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Sovereign debt restructuring unlikely near term-CS
Tue May 25, 2010 4:11pm EDT
NEW YORK, May 25 (Reuters) - Attempts to restructure the debt of peripheral European nations including
Greece are unlikely in the near term, as they would likely necessitate more brutal austerity measures than already planned and risk bank runs, Credit Suisse said in a report on Tuesday.
"Our subjective judgment is that the current incentive structure for all peripheral countries is overwhelmingly in favor of trying to comply with the austerity targets already set out or agreed with the EU and the IMF," Credit Suisse analysts said in the report.
"That is because there is NO, repeat NO, orderly way to restructure sovereign debt within the currency union," they said.
Greece, Italy and other countries implemented austerity measures after the European Union and International Monetary Fund announced a nearly $1 trillion lifeline for heavily indebted nations such as Greece, Portugal and Spain, in a bid to reinforce the euro and contain fiscal problems.
"Because it is not possible to use capital controls, restructuring today would imply the need to run a zero budget deficit and current account deficit on the day of the restructuring, a much more brutal outcome than the existing austerity programs require. It would also imply a huge risk of a catastrophic bank run," Credit Suisse said.
"So our view is that it is -- as a first approximation -- sensible to assume that no restructuring will take place imminently and none until it is much safer to attempt one," the analysts said.
Credit Suisse ranked countries based on risks of restructuring their debts based on factors including their foreign exchange regime, diversity of industry sector and ability to force domestic savers to purchase government debt if necessary, such as through the banking system.
Cyclical factors including debt relative to gross domestic product, government holdings of assets relative to net debt, ratio of interest payments to potential growth and interest rate volatility were also considered.
The bank deemed the debt of
Greece, Spain, Portugal and Ireland as the most at risk.
By contrast, the debt of the United States, China, Germany, Switzerland, Australia, Italy,
Japan and Canada was seen as low risk. Bonds of Britain and France ranked slightly below this low-risk group.
Italy was deemed low risk because it has a high primary budget balance, which offsets its high interest payments.
Sovereign debt defaults have historically been the result of structural rigidities such as fixed exchange rates and political inability to make tough decisions to deal with risks and shocks such as wars, rather than debt and deficits, Credit Suisse said.
Countries with floating currencies, independent central banks and domestic currency debt typically have negligible credit risks, the bank said.
Unsustainable liabilities of these countries instead pose risks of longer-term inflation if they are not able to cap or reduce their commitments.
"Arguably, it is the euro zone's structural immaturity -- its lack of formal fiscal transfers, its internally fixed exchange rates, and its unrealistic post-euro inception treatment of certain countries' debt -- that is the real reason for the peripheral debt crisis," Credit Suisse said.
Recent efforts by European authorities to contain the crisis are "designed to buy time -- a lot of time -- to negotiate new and sustainable terms for a political/fiscal union by preventing a liquidity and funding crisis for both peripheral sovereigns and European banks," the bank said. (Reporting by
Karen Brettell; Editing by
James Dalgleish)
