Germany Floats Greek Restructuring as Papandreou Pushes Cuts
Bloomberg April 16, 2011 04:00 AM
Saturday, April 16, 2011
(Adds report about possible debt-swap in ninth paragraph.)
April 16 (Bloomberg) -- German officials are putting Greek debt restructuring on the table over declarations by leaders in Athens and policy makers elsewhere in Europe that Greece will make good on its obligations.
German Deputy Foreign Minister Werner Hoyer said yesterday a Greek restructuring "would not be a disaster." The previous day, Finance Minister Wolfgang Schaeuble was quoted by Die Welt newspaper as saying "further measures may have to be taken" if Greece flunks a June audit.
Chancellor Angela Merkel's deputies are raising what has been a taboo issue for European officials -- a restructuring by a euro member -- to show its unwillingness to contribute to more bailouts, Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a phone interview. Germany is the largest contributor to European Union rescue funds, which have been tapped by Ireland, Greece and Portugal.
"This is part of a gambit in negotiations," Schmieding said. "If Greece doesn't get access to markets, the funds will probably run out sometime in 2012. That, I think, is the German message: Don't count on us to add more money."
The remarks by Hoyer were the most explicit by a European official showing a 110 billion-euro ($159 billion) bailout for Greece may fail to prevent the first default by a euro country. Greek Prime Minister George Papandreou yesterday repeated his vow to avoid a restructuring as his government announced 76 billion euros of austerity measures.
'We Are Worried'
Greece has "done a tremendous job in reforming the country," Hoyer, who is minister for European affairs, said in an interview in Berlin. "Whether all this is enough, whether the results will be there soon enough, is a different question. We are looking at the economic developments, the fiscal developments in Greece and we are worried."
Bonds of Europe's most indebted nations fell for a third day, pummelled by a Moody's Investors Service downgrade of Ireland to the lowest investment grade and Hoyer's comments. The yield on 10-year Greek debt jumped 55 basis points to 13.83 percent, widening the spread over German bunds to a record 1,045 basis points.
'No Disaster'
"A haircut or a restructuring of the debt would not be a disaster," said Hoyer, a member of the Free Democratic Party, a junior partner in Merkel's coalition. If Greece's creditors agreed that talks "would be helpful toward a restructuring of the debt, then of course this would be supported by us."
German officials are considering a plan to enable holders of Greek sovereign bonds to swap them for safer securities guaranteed by Euro-member countries, the Financial Times reported today, citing unidentified officials in the chancellery and the Finance Ministry. Another option would be for a trust to buy the bonds and extend their maturity or retire them, the paper said.
Merkel is on the defensive after losing control of a key state in a regional election last month amid public opposition to nuclear power. Merkel's Christian Democrats and their Free Democratic coalition partners trail the opposition Social Democrats and Greens by 38 percent to 50 percent, an FG Wahlen poll for ZDF television showed yesterday. The gap has widened to from 8 points last month as the Greens surged.
Greek Cuts
The questions over Greek finances came as Papandreou stepped up efforts to reduce the budget deficit, outlining 26 billion euros in cuts and 50 billion euros in asset sales.
The Finance Ministry in Athens said the sales will cut debt by 20 percentage points by 2015. The government, with debt of about 300 billion euros, will sell stakes in phone, power and gambling companies and the Athens airport to trim a debt load set to peak at 159 percent of gross domestic product in 2012.
"Greece's problems won't be solved by restructuring its debt but by restructuring the country," Papandreou said. "Even if with the wave of a wand the debt disappeared, Greece in a few years would have debts again without these reforms."
The measures are aimed at meeting a target, agreed with the EU and the IMF as a condition for the bailout, to cut the deficit to less than 3 percent of GDP by 2014 and a self-imposed goal of reducing it to below 1 percent by 2015. The government still aims for a deficit of 7.4 percent this year, even after first-quarter revenue missed the target by 1.4 billion euros.
Backing Greek efforts, European officials have dismissed restructuring as a policy option.
'Fragile' Environment
European Union Economic and Monetary Affairs Commissioner Olli Rehn said April 14 that a debt restructuring in the euro region could cause a "chain reaction through the banking sector," calling the environment still "fragile."
European Central Bank Vice President Vitor Constancio said that he doesn't see a threat of a default in Greece or Ireland.
"I don't think any restructuring is really justified. We have to stick with programs that are now in place both for Greece and Ireland and very soon also for Portugal," he said in an interview in New York yesterday. "I hope that after that markets will consider the situation as being more stable."
Steffen Seibert, Merkel's chief spokesman, said April 6 that Germany prefers that Greece pursue austerity measures. "There is no instrument for such a restructuring," he said.
Still, yields on two-year Greek debt at 18.5 percent suggest investors are anticipating they're not going to be repaid in full and on time.
"The issue of Greece is not whether there will be debt restructuring, but when it will be done," Nouriel Roubini, the economist who predicted the global financial crisis, said yesterday at a conference in Almaty, Kazakhstan.
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Germany Floats Greek Restructuring as Papandreou Pushes Cuts
