Greece must meet its restructuring fate

by Nicholas Economides and Roy Smith

Financial Times
April 19, 2011

It has been almost a year since the €750bn European Financial Stability Fund was created to bail out over-borrowed Eurozone states, of which Greece was the first to falter.

Despite a €110bn loan from its neighbours, substantial budget tightening and reforms, and a change of government, Greece looks today even further away from a return to the markets than it was before the crisis. Whatever it is that the EFSF’s loan and the European Central Bank’s market purchases of Greek debt were supposed to do, the market hasn’t bought it. It clearly is expecting restructuring.

Recently Der Spiegel reported that several Eurozone finance ministers told ECB President Jean-Claude Trichet that the Greek stabilisation plans were behind schedule and the debt ought to be restructured. Mr Trichet reportedly blocked the idea and refused to discuss it, and the EU’s Economic and Monetary Affairs Commissioner Olli Rehn agreed, saying that restructuring was out of the question. The main reason for their reluctance is the fear that any restructuring would have severe consequences on European banks, especially those from France, Germany and Switzerland.

This fear is well-placed because these banks have not accounted for their Greek or other sovereign holdings at market value, and accordingly, would have to incur substantial writedowns if a restructuring occurred.

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