Life after Debt: The Greek PSI and its aftermath

Abstract:

The Greek debt exchange (PSI) that took place in March 2012 was unprecedented in two ways: it was the biggest sovereign default ever and the first within the euro area. This paper examines the debt exchange and the subsequent debt buyback with a view to drawing lessons for policymakers and market participants. It discusses the interaction between the political dimension and the market perception, including areas of actual or potential conflicts between the two. The paper does not address Greece’s longer-term prospects for debt sustainability or euro area membership, but instead focuses narrowly on an assessment of the debt exchange and its aftermath, taking into account its impact on the broader euro area crisis.

The paper is organised as follows: the first two main sections briefly review the history and decisions that led to the Greek debt exchange, seen from the perspective of the developing euro area crisis. After that, the debt exchange and its impact on the debt burden are discussed, following which the debt buyback that took place in December 2012 is reviewed. The final section draws some policy conclusions.