Recently I had a conversation about the Greek debt reduction of 2012 and it seems that a lot of people still analyze that period using the nominal haircuts imposed on Greek bondholders with the PSI and the debt buyback of December 2012. The reality though is that the actual reduction in the Excessive Deficit Procedure (EDP) government debt of Greece in that year was far lower.

The PSI exercise reduced Greek debt by a nominal amount of €106bn while the debt buyback resulted in another €20.5bn nominal debt haircut for a combined result of €126.5bn. Yet the PSI also involved reducing debt held by government entities (such as pension funds) which are not counted in the EDP debt (since they are intergovernmental holdings) while it also required a large increase in government liabilities in order to provide the banking system with the necessary funds for recapitalization. As a result, the stock-flow adjustment for 2012 (based on Ameco data) was only -€68bn. If one also takes into account that the 2012 government budget included €5.3bn in support for financial institutions, the end result is a haircut of only €63bn meaning that every Euro in nominal debt haircut actually reduced EDP debt by 50%.

It is true that the recapitalization also created a government asset in the form of bank shares which will result in a future improvement of the headline debt figure. Nevertheless, the Greek financial stability fund (HFSF) has already ‘lost’ close to €10.5bn in covering funding gaps while its bank shares holdings were valued at €17bn at the end of 2014Q3. It still has around €11bn in unused funds although the government’s intention is to use them in creating a ‘bad bank scheme’ to clear banks from NPLs (something with which Ι agree completely). Overall, the room for debt reduction through the HFSF assets seems a bit thin and will probably not produce a drastic improvement of the headline debt figure.

Given that the PSI did not include the SMP and ANFA holdings of the Eurosystem it resulted in a large hit on Greek debtholders with a much lower reduction of the stock-flow adjusted debt (and even of net debt). It is mostly a proof that postponing debt restructuring (and creating a debt seniority hierarchy in the meantime) almost always results in inefficient outcomes.