Year after bailout, Greece rejects debt restructuring
Tue May 3, 2011 7:36am EDT
By George Georgiopoulos and Andrei Khalip
ATHENS/LISBON (Reuters) - Greece insisted on Tuesday any restructuring of its debts would be a disaster for the economy, but financial markets continue to view it as likely and are betting that the euro zone debt crisis will worsen.
In Portugal, European Union and International Monetary Fund experts pursued negotiations over a bailout with Lisbon's caretaker government, with one newspaper that the headline figure could end up being substantially higher than expected.
A year and a day since the EU and IMF agreed to extend Greece 110 billion euros ($163 billion) in loans in exchange for deep structural adjustments to its economy, the finance minister again dismissed growing suggestions that Athens will have to restructure its debts, which are set to hit 150 percent of annual output, or around 340 billion euros, this year.
"A restructuring, haircuts on debt, would be a huge mistake for the country," Finance Minister George Papaconstantinou told state television as EU and IMF inspectors began a new visit to assess if the government's austerity plans are sufficient.
"It would have a very big cost and we would not have the benefit, we would stay out of markets for 10-15 years, the wealth of Greek pension funds would suffer writedowns, we would have problems in the banking system and hence the real economy."
Despite the minister's insistence, two German government advisers said last week a restructuring of the debt pile, which is only increasing as Greece's output contracts, was now inevitable, and markets hold the same view.
European Central Bank policymaker Nout Wellink said on Monday he was open to the idea of extending maturities on Greek debt, becoming the first senior ECB official to admit that possibility publicly.
JP Morgan said the likelihood of a Greek restructuring this year was rising, although it was not guaranteed.
"We are not yet ready to forecast that a debt restructuring will occur this year, but we have to recognize that the risk has risen relative to our baseline assumption that any decisions about debt restructuring would be delayed until 2013," it said.
Yields on Greek 10-year government bonds now stand at 15.5 percent, nearly 12 percentage points higher than equivalent German bonds, a stark measure of the extra risk investors take on by holding Greek sovereign debt.
An even clearer illustration that some form of debt restructuring is inevitable can be seen in the two-year bonds, which are yielding 25.7 percent -- an unsustainable figure that implies Greece cannot but reschedule some repayments.
Under the umbrella term "debt restructuring" there are various options, ranging from writing down the value of the debt by a set amount, known as a haircut, to rescheduling when the debt will be repaid, which is a softer form of restructuring.
While Greece is adamant that there will be no haircuts, a move that would alarm bondholders including many of Europe's biggest banks and the European Central Bank, some form of rescheduling is a possibility, euro zone sources have said.
"It's very difficult to imagine what else Greece can do," a euro zone finance official said last week. "Without growth, its debts just keep growing. If it's going to get back on top of them, it's got to reschedule at some point."
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L'eterno dibattito ...
