Is Greece overrated

Renewed debt rescheduling risk of Greece overrated - Cavallo

Bondholders overestimate the risk that Greece will demand a second haircut or exit the euro after the largest debt restructuring in history. This is what Domingo Cavallo says, when he was Minister for Economic Affairs in Buenos Aires in 2001 and tried to avert Argentina’s record default.

The latest debt rescheduling, in which Greece was able to write off liabilities of over 100 billion euros, gives the country enough relief to tackle economic reforms, explains Cavallo. He resigned as Minister of Economic Affairs after Argentina failed to service liabilities of over $ 95 billion in December 2001, which resulted in a record state bankruptcy. If necessary, the European heads of government would reduce the cost of loans to Greece and keep the country in the euro area, he says.

Yields on Greek bonds due February 2023 climbed above 20 percent last week for the first time since the government issued them as part of the haircut. Yields rose from 18.5 percent on March 12 to 20.1 percent on March 23 after concerns that the haircut would not reduce debt to sustainable levels.

"If I had these bonds, I would hold them and not sell them at such a discount," said Cavallo in an interview at the Yale University conference in New Haven, Connecticut. Current rates are "mislead," he added.

Cavallo had slowed Argentina's hyperinflation in the early 1990s by pegging the peso to the dollar, limiting money supply growth, and privatizing state-owned companies. The then President Fernando de la Rua brought him back to the government as Minister of Economics in March 2001 - in the vain hope of avoiding a default after the deepening recession.

After the haircut and the implementation of spending cuts, Greece received the green light from the eurozone countries on March 14 for a second rescue package of 130 billion euros. With the rescheduling, the Greek debt should fall from currently around 160 percent of gross domestic product to 120.5 percent by 2020.

For Europe, the costs of Greece leaving the euro area are “much greater” than remaining in the country and gradually implementing the necessary reforms, says Cavallo. “Greece owes Europe a lot of money. If Greece has large budget deficits for a while, Europe will help out. "

In contrast, Pacific Investment Management Co., which manages the world's largest bond fund, sees “significant risks” that Greece will leave the euro, wrote Andrew Balls, head of European portfolio management, on the wealth management website on March 19.