May 3, 2011

Greece Says No to Restructuring Debt

Finance minister calls it a "huge mistake for the country"

A year and a day ago, Greece received a bailout from the European Union (EU) and the International Monetary Fund (IMF), and since that time the cost of borrowing money has risen steadily for Athens, with the yields on 10-year bonds standing currently at 15.5%—almost 12% higher than the yield on equivalent German Bunds.

For shorter-term debt, the situation is even worse, with the yield on 2-year bonds at 25.7%. Such a level is considered unsustainable, making it appear that Athens will have no other alternative but to restructure its debt.

However, according to a Reuters report on Tuesday, Greece's finance minister insisted that the country would not benefit from a restructuring; indeed, he said the opposite would be true. "A restructuring, haircuts on debt, would be a huge mistake for the country," Finance Minister George Papaconstantinou said on Greek television even as EU and IMF inspectors arrived to determine whether austerity plans proposed by the Greek government will be up to the challenge the country faces.

"It would have a very big cost," added Papaconstantinou, "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."

Markets seem to disagree, especially since Greece currently holds 110 billion euros ($163 billion) in loans, and even German government advisors have weighed in with the opinion that haircuts are necessary. On Monday Nout Wellink of the European Central Bank (ECB) said he would entertain the possibility of maturity extension on Greece's debt; he is the first ECB official to say so.

J.P. Morgan said that the likelihood of restructuring was rising, although it was not certain that it would take place this year. In a statement, it said, "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."

Restructuring can take various forms, including writing down the value of the debt by a set amount—also termed a haircut—to rescheduling repayment, not as drastic a move as a haircut.

Last week a euro zone finance official was quoted saying, "It's very difficult to imagine what else Greece can do. 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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