Wednesday 17 January 2018

Short View: Debt negotiation

DEBT negotiation is a difficult process to manage and to be part of, regardless of which side you are on. If the process is protracted, it usually indicates a shift of power from creditor to debtor. Each side has a nuclear button and neither party really wants to push it.

High-level financial analysis will always guide towards a logical and realistic recovery number -- for example 50 cents in the euro. However, the path between expectation and reality is blocked by emotion, pride and fear and is the rubicon on the journey to settlement.

Greece and the European Central Bank are now locked in such a battle and the implications of this are hugely important for Ireland. Once both parties are willing to accept the reality -- that Greece and Ireland are insolvent -- there is no limit to the number of financial arrangements that can be employed to save face for both and to effect what amounts to an accounting transfer of wealth.

In European banking, it is important to be able to define exactly what "restructuring" means. This is because there is a big market in betting on such events and in effect restructuring is the same as default -- except the level of recovery can be different.

The markets agree that any reduction of contracted interest rates or an extension of maturity -- so-called "reprofiling" -- constitutes a restructuring event, and therefore a payout under any bets made.

Thus the nuances of a default are less important to the markets but are hugely critical for Eurocrats and politicians.

As the Greeks run out of money, Ireland has a great opportunity now to sit back and see how far they push it and what reaction they get. By the time it's our turn to face reality, at least the emotion will be gone.

Max Doyle is a principal of Prime Focus Management, specialising in investment and the turnaround of Irish companies

Sunday Indo Business

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