May 19, 2024

Talk of Greek Debt Restructuring Just Won’t Die

The Greeks reject a debt restructuring out of hand. The European Central Bank fears that such a move will spread financial panic. And, meanwhile, the European Union and the International Monetary Fund insist that their recipe of bailouts combined with sharp spending cuts make restructurings unnecessary.

Nevertheless, the notion keeps popping up that Greece, and perhaps even other weak European Union countries like Ireland and Portugal, will be forced to restructure.

Almost a year after it was saved from default by a bailout of 110 billion euros, or about $157 billion, from its European partners and the I.M.F., the Greek economy continues to sag under 340 billion euros in debt. Greece’s budget deficit is expected to be 8.4 percent of gross domestic product this year, compared with a mandated target of 7.5 percent.

The bond markets have taken note as economists, as well as German politicians, have emphasized a restructuring solution that will require bond investors and banks to take a loss on their debt holdings. On Monday, the yield on 10-year Greek bonds hit a high of 14.3 percent. Yields on Spanish and Portuguese debt also shot up as electoral gains made by an anti-euro party in Finland fed concern that a possible 80 billion-euro plan to rescue Portugal — which requires unanimous assent by European Union countries — might be jeopardized.

All of which reflects an emerging view, although it has not yet been officially stated, that it makes little economic sense for the monetary fund and the European Union to keep lending money to Greece so that the government can pay back private investors at double-digit interest rates — especially as Greek citizens suffer the effects of a severe austerity program.

“Behind the curtains, they are looking for a smooth restructuring,” said Theodore Pelagidis, an economist in Athens and the author of recent book on the Greek economy’s collapse. “The basic reality is that we cannot service our debt, and if Greece does not see a radical solution, it will consume itself.”

Proponents of restructuring say banks have had more than a year to prepare by either selling positions at a loss or raising capital. The markets, proponents argue, have already factored in a restructuring, so why wait until 2013 for investors to take their first losses, as proposed by European leaders in the structure of the future bailout funds?

Until recently, France and Germany — and especially the European Central Bank — have been adamantly opposed to any restructuring that would require investors to take “a haircut,” or reduced returns, because of the effect this might have on French, German and Greek banks.

Lately, however, there have been signs that once-closed minds are opening up to alternative solutions.

The German finance minister, Wolfgang Schäuble, raised the possibility of a Greek restructuring last week in comments to a German newspaper. He also alluded to an coming European Union study on the sustainability of Greek debt that would guide Europe’s conduct on the issue.

It is not clear what the conclusion of the report, expected to be published in June, will be. One option that has attracted some attention, though, is a plan that would ask bondholders to trade in their current paper for debt with lower rates and longer maturities.

Such a proposal, which was successfully used by Uruguay in 2003, would, in theory, minimize banking losses and extend debt payments further into the future, easing Greece’s financing burden in the near term.

“It’s being talked about more, and the official sector should want to do this,” said Lee C. Buchheit, a lawyer for Cleary Gottlieb Steen Hamilton, who has worked on debt restructuring deals dating back to the 1980s. In Greece’s case, however, “the worry is that it may not go far enough. This is a country where debt is 150 percent of G.D.P.”

Mr. Buchheit, who recently co-wrote a paper on possible variations for Greece’s debt crisis, says an approach like this would be similar to a solution reached on Latin American debt in the 1980s in that it would give creditors and debtors more time to prepare themselves for an eventual restructuring.

But before banks accepted such a deal, they would require extra cash, which in today’s political environment might be difficult to come by.

They will also need to be persuaded to, in effect, increase their exposure to Greece at a time when the country’s efforts at reviving its economy seem to be stumbling amid continued difficulties in raising the revenue it needs to reduce its deficit.

As the country where the debt crisis began, Greece remains the focal point of investors’ concerns. The tax increases and spending cuts being imposed by the Greek government as part of its rescue package have deepened an already pervasive gloom in Athens. Some economists now forecast that Greek growth will plunge 2 to 3 percent in 2012 after an expected 4 percent retraction this year.

Such a double dip would likely drive unemployment, already around 14 percent, to Spanish levels of around 20 percent and further complicate the Greek government’s task of persuading its citizens to sacrifice more.

With 25 billion euros that Greece must raise from the public markets in 2012, the pressure is building on Athens to find a solution that somehow shares the pain more equally.

“Greece is a symbol of the crisis,” said Mr. Pelagidis, the economist. “We don’t need another bailout — we need creditors to take a hit.”

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