Expectations Grow for Greek Debt Restructuring

New York Times
April 18, 2011

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 makes 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.”

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