The ongoing Greek debt crisis is entering another phase.  Greece is now in the process of trying to renegotiate around $130 billion of its debt with private creditors.  These private creditors are banks and other investment firms.  The Greek government and other euro zone finance ministers are trying to get these private creditors to swap their existing Greek government bonds for new ones.  The new ones will have only half the face value of the old bonds and have a much longer maturity.  Also, Greece says that it can only afford to pay an interest rate of 3.5% on the new bonds.  The private creditors are obviously not happy with having to take a 50% haircut in the value of their Greek bonds.  They have stated that they must receive an interest rate of at least 4% if they agree to take such a loss on the bonds they hold.

The success of the Greek debt restructuring is likely to have significant repercussions in the euro zone area. If the private creditors who hold the existing bonds are not treated somewhat well, they and others will be very reluctant to purchase any bonds in the future.  On the other hand, Greece could very well have to default on its debt if they are unable to get their creditors to accept these new terms. Furthermore, the bondholders of other countries in the euro zone area will be watching intently as this saga plays out.  The risk of a Greek default is still real and would likely create a great deal of turmoil in the euro zone area.

The European Central Bank, the ECB, is obviously following these negotiations closely.  Also, the ECB has channeled hundreds of billions of Euros to the region’s banks through a new program offering three-year loans at cheap interest rates.  Banks are able to borrow at 1% and use this money to invest in government debt at much higher interest rates.  This has increased liquidity in the banking system and brought down the cost of borrowing for many euro zone governments.

This is perhaps the most critical period of the Greek debt crisis and is being watched closely by investors.  The odds seem to favor a debt restructuring that will, although not completely satisfying to either side, enable Greece to avoid defaulting on its debt and allow private creditors to salvage some value on their investments.  Hopefully, this coupled with the stimulus from the European Central Bank, will allow the euro zone area to embark on a path to better financial health.

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