In March and April 2012 Greece defaulted on its debt by swapping its outstanding obligations for new obligations of much lesser face value. For each euro of face value outstanding, a holder of Greek debt was given the following securities with an issue date of 12 March 2012.

6 This case is based on information and analysis published in “The Greek Debt Restructuring: An Autopsy,” J. Zettelmeyer, C. Trebesch, and M. Gulati, Economic Policy ( July 2013) 513–563. For pedagogical reasons, some details of the bond issues were changed marginally to simplify the calculations.

■■ Two European Financial Stability Fund (EFSF) notes. Each note had a face value of 7.5 ¢. The first note paid an annual coupon (on the anniversary of the issue date) of 0.4% and matured on 12 March 2013. The second note paid an annual coupon of 1% and matured on 12 March 2014.
■■ A series of bonds issued by the Greek government with a combined face value of 31.5 ¢. The simplest way to characterize these bonds is as a single bond paying an annual coupon (on December 12 of each year) of 2% for years 2012–2015, 3% for years 2016–2020, 3.65% for 2021, and 4.3%
thereafter. Principal is repaid in 20 equal installments (that is, 5% of face value) in December in the years 2023–2042.
■■ Other securities that were worth little.
An important feature of this swap is that the same deal was offered to all investors, regardless of which bonds they were holding. That meant that the loss to different investors was not the same.
To understand why, begin by calculating the present value of what every investor received. For simplicity, assume that the coupons on the EFSF notes were issued at market rates so they traded at par.
Next, put all the promised payments of the bond series on a timeline. Figure 6.7 shows the imputed yields on Greek debt that prevailed after the debt swap was announced. Assume the yields in Figure 6.7 are yields on zero coupon bonds maturing in the 23 years following the debt swap, and use them to calculate the present value of all promised payments on March 12, 2012.
Next, consider 2 different bonds that were outstanding before the default (there were a total of 117 different securities).
■■ A Greek government bond maturing on March 12, 2012 ■■ A Greek government 4.7% annual coupon bond maturing on March 12, 2024.
Using the yields in Figure 6.7, calculate the value of each existing bond as a fraction of face value.
Bondholders of both existing bonds received the same package of new bonds in exchange for their existing bonds. In each case calculate the haircut, that is, the amount of the loss (as a fraction of the original bonds’ face value) that was sustained when the existing bonds were replaced with the new bonds. Which investors took a larger haircut, long-term or short-term bondholders?
Assume that participation in the swap was voluntary (as was claimed at the time), so that on the announcement the price of the existing bonds equaled the value of the new bonds. Using this equivalence, calculate the yield to maturity of the existing bond that matured in 2024. What might explain the difference between this yield and the yields in Figure 6.7?