How to Restructure Greek Debt

Abstract

Plan A for addressing the Greek debt crisis has taken the form of a €110 billion financial support package for Greece announced by the European Union and the International Monetary Fund on May 2, 2010. A significant part of that €110 billion, if and when it is disbursed, will be used to repay maturing Greek debt obligations, in full and on time. The success of Plan A is not inevitable; among other things, it will require the Greeks to accept - and to stick to - a harsh fiscal adjustment program for several years.

If Plan A does not prosper, what are the alternatives? And how quickly could a Plan B be mobilized and executed?

This paper outlines the elements of one possible Plan B, a restructuring of Greece’s roughly €300 billion of government debt. Prior sovereign debt restructurings provide considerable guidance for how such a restructuring might be shaped. But several key features of the Greek debt stock could make this operation significantly different from any previous sovereign debt workouts.

To be sure, a restructuring of Greek debt will not relieve the country from the painful prospect of significant fiscal adjustment, nor will it displace the need for financial support from the official sector. But it may change how some of those funds are spent (for example, backstopping the domestic banking system as opposed to paying off maturing debt in full).

This paper does not speculate about whether a restructuring of Greek debt will in fact become necessary or politically feasible. It focuses only on the how, not the whether or the when, of such a debt restructuring.