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EU Says Greek Restructuring Possible

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A senior European Union (EU) official said Tuesday that it was possible Greece might need to restructure its debt. This was the first official acknowledgment that such an action might occur, and it was met with swift resistance from other euro zone officials. The effect on European banks and the European Central Bank (ECB), which all hold substantial amounts of Greek debt, would be huge. American banks also hold Greek bonds.

Reuters reported that Jean-Claude Juncker, chairman of the 17-nation Eurogroup, said at a seminar that coincided with a meeting of EU finance ministers that it would be necessary to move toward something he termed a "soft restructuring" of Greece’s debt.

While he said that Greece must first raise 50 billion euros ($70.7 billion) through privatizing state assets and apply the money to its debt, once that was accomplished some kind of restructuring might be attempted. In the report he was quoted saying, "If Greece makes all these efforts, then we must see if it is possible to make a soft restructuring of Greek debt. I am strictly opposed to a major restructuring of Greek debt."

Other members of the group, however, dissented. After Juncker had commented on the possibility of "reprofiling" Greece’s debt, extending loan maturities without any more extensive action, French Economy Minister Christine Lagarde was quoted as saying late on Monday, "Restructuring, rescheduling—off the table . . . A restructuring or a rescheduling, which would constitute a default situation, what we would call a credit event, are off the table for me."

Ewald Nowotny, a member of the governing council of the ECB, also said a "soft restructuring" was not planned.

Yet three different terms are now being used to describe some sort of action over Greece’s debt that would involve a change in repayment: restructuring, rescheduling, and reprofiling. "Soft restructuring" has now been added to the equation. Reprofiling or soft restructuring could be done with bondholders’ cooperation, and would thus not trigger a credit event and a requirement for insurance to pay out on a default, according to analysts.

Reprofiling could still cause credit problems, however, if shorter-term bonds were exchanged for longer-term ones resulting in the holding entity experiencing a delay in repayment and thus credit issues. Restructuring, on the other hand, would cause enforced losses.

In a research note, Credit Suisse said that it expected a voluntary restructuring of Greece’s debt, but that it should not cause a credit event despite the fact that it would have repercussions. In the note, it said, "We believe that a principle writedown needs to be part of the solution for Greece. This is likely to put more pressure on German yields than on Spain or Italy, due to the exposure of the German banking system to Greece, and more importantly to Ireland."