Sovereign and corporate balance sheet advisors are normally somewhat between discreet and secretive, partly so as not to draw too much attention to a client that may be struggling, but also because they don’t perce
ive it as appropriate to provide personal opinions about topics such as debt relief or to hog the limelight, in contrast with the proverbial corporate finance rainmaker. This we feel described Lazard and its approach to running spreadsheets and interference on behalf of countries such as Argentina and Cote d’Ivoire, among others. However, once the spotlight on its renewed Greek advisory contract became too much, its leading figures were forced to open up about strategy and tactics, past and present.
Naturally, it’s the objective of a financial advisor to provide the best advice for his client, but if the tactics prove too successful in the short run, they might prove unsuccessful in the long run, by delaying market access when this would be helpful towards fuelling a nascent recovery. On the other hand, it has become quite clear that having been thrust under the spotlight, Lazard will be publicly pushing for more debt relief for Greece than would otherwise have been the case. In addition, it is worth noting that the measure of a good advisor is its ability to work equally as well with political masters across the spectrum, and in the Greek example, this should not go unnoticed.
It is widely acknowledged that the current public debt stock equivalent to about 170% of GDP is unsustainable, and although the examples of Portugal and Italy suggest that ratios above 120% of GDP need not be disastrous to funding or growth prospects (five year government bond yields being around 1.5%) – the IMF projects Greek government debt around that level by 2020 – there remains the open question of how this country will get there. Moreover, the IMF readily admits that the ‘fiscal adjustment’ to date ‘has been extraordinary by any international comparison.’
As a result, it is conceivable that the IMF will push the EU to agree to debt relief on the Greek public debt stock, but let’s not forget that bondholders have already agreed to significant haircuts, and there are a variety of ways to reaching other debt reduction goals, beyond simply reducing the nominal amount of principle owed. A face saving technique would be to lower the annual coupon payments and stretch out the maturities, and this would be more politically amenable to creditor countries as well.
A principal write-down coupled with the type of ‘GDP warrants’ already attached to rescheduled private debts, and actually a concept which is decades old, would be a fair compromise in theory, but in practice it will be a fine line between future Greek governments paying a fair extra amount and public opinion in one country or another believing it has under- or over-paid. In addition, this type of renegotiation would take many months, if not years, perhaps stretching beyond Syriza’s initial mandate.
In any case, its politicians will have to tone down the rhetoric if they wish to convince the wealthier creditor nations of the desirability of any kind of debt reduction, because after all Greece remains an upper income country, and the hard-line strategy could quickly backfire as regards an international public opinion which for now remains quite supportive.
Richard Segal
Economist
Jefferies
