Successful completion of the distressed bond exchange provides significant debt relief and allows Greece to avoid an immediate hard default on a bond maturing later this month, says Moody’s. However, the risk of a later default remains high.
The exchange is a significant milestone in the evolution of Greece’s sovereign crisis and removes one important source of uncertainty plaguing European sovereign and bank debt markets. Yet even with the debt exchange reducing Greece’s debt burden by more than €100 billion and the Troika programme providing lower financing costs, the risk of Greece defaulting after the debt exchange has been completed remains high.
Even under optimistic assumptions, we do not expect Greece’s debt burden to return to 120% of GDP until 2020 at the earliest.
The magnitude of the debt haircut and the country’s actions in coercing the participation of holdouts increases the likelihood Greece will not have access to the private market once the second assistance package expires.
Meanwhile, Greece faces significant challenges implementing its planned fiscal and economic reforms and satisfying the conditions for ongoing financial support from the Troika. Given that most of Greece’s remaining debt will be owed to its euro area partners, the European Financial Stability Facility, or the IMF, any future debt restructuring will involve not only losses for private-sector investors, but also likely include official sector involvement, with an accompanying escalation in political risks.