Greece had made an offer to bondholders that would ask them to write off about $140 billion, which would make this the biggest sovereign debt restructuring in history. We should all take note since this conundrum is the reward Greece gets for years of excessive debt and an unsustainable lifestyle. Investors are being asked to forgive 53.5% of the principal and exchange current holdings for new Greek government bonds and notes from the European Financial Stability Facility.
Twelve members of the steering committee have signed on, but more bond holders need to climb on board for the deal to work. The Greek government has said that 75% of all bondholders must participate if this planis to work. It is hard to imagine that the deal won’t fly given the potential for a liquidity crisis in Greece and then Portugal. No one wants to see Greece become Lehman Brothers.
The question is, “Will Greece learn from this experience and embrace austerity?” Austerity is hard on the economy and on individuals. There will need to be an overwhelming sense of self- sacrifice for the good of the nation coupled with a sense of gratitude for all those who bailed them out. That would be asking a lot after a generation of generous government spending.
It is entirely likely that the crisis will be passing as bondholders take a 53.5% write off on what they hold. It seems equally likely that we will be back here again in a couple of years.