Let’s assume that everybody would agree that if Greece’s sovereign debt were reduced to 60% of GDP (let’s say to 120 BEUR), Greece could service that debt (including interest payments) without problems. Put differently, experts would refer to it as being “sustainable”.
Following this logic, the remaining debt (I have lost track where that would stand now but let’s assume we are talking about another 150 BEUR) would be considered as “unsustainable”. Some might immediately suggest that these 150 BEUR should be forgiven.
The better idea would be to issue Evergreen Bonds for 150 BEUR. They could have a tenor of, say, 99 years but they could also have no maturity at all. What is important is that they have regular interest payment dates; ideally every 6 months.
The interest rate would be fixed at a margin over Interbank to be reset every 6 months. For, say, the first 10 years, interest would be capitalized to give Greece a chance to catch breath.
So here you have, at least for the next 10 years, a solution which is economically equivalent to a 150 BEUR haircut (no principal must be paid and no interest expense flows through the budget). However, it is not a haircut because the creditors maintain 100% legal claim. To give that to creditors wouldn’t cost Greece anything but it would be of significant value to creditors.
Why would creditors agree to such a scheme? For a very simple reason, namely, because their alternative might be worse; they might have to – again – forgive that amount of debt. If you don’t believe me, then ask those creditors who lost money with the recent PSI if they hadn’t preferred to receive Evergreen Bonds instead. Even though those bonds wouldn’t have had any value for the next 10 years, they would have represented a legal claim.
Now, here is the wonderful thing about Evergreen Bonds. Their value is not driven by the likelihood that they will ever be paid (no one alive will live long enough to see the 99-year maturity…). Their value is driven by the assessment of whether or not the next interest payments can/will be made.
Evergreen Bonds might trade close to zero during the first 10 years of interest capitalization. They might stay close to zero if Greece did not succeed in turning its economy around. BUT: should Greece succeed in turning its economy around, Evergreen Bonds could become a very attractive investment instrument: if they increased in value to, say, only 20% of nominal (from near zero), their holders would still make a killing.
In a way, Evergreen Bonds would be a kind of rating agency where the rating is done by the markets. If Greece is perceived to do well, their prices will rise. If not, they will decline. And this would go on for at least 99 years…