Greece: a restructuring looks inevitable

Financial Times
April 27, 2011

Summer is approaching, and thoughts turn naturally to Greece. The islands! The sunshine! The default! The debate about whether Athens needs to restructure its debt – and when – is gaining in volume. And so it should. Investors are not convinced that the country is solvent or that its debt is sustainable. This should worry the European Union and the International Monetary Fund, Greece’s lenders of last resort.

Greece could have a debt to gross domestic product ratio of 170 per cent by 2013, when the EU-IMF bail-out expires, from about 135 per cent now, according to Capital Economics. The ratio keeps climbing largely because the GDP denominator keeps shrinking: the central bank estimates that the economy will shrink 3 per cent this year, after a 4.5 per cent drop in 2010. That is pushing up the cost of debt-servicing. Deutsche Bank reckons that, even if it could keep borrowing at EU-IMF rates, Greece’s annual interest cost would reach 9 per cent of GDP, compared to an average of 3.4 per cent for eurozone countries over the past 30 years. Interest would gobble up 27 per cent of core tax revenues every year, compared to a eurozone average of 9.5 per cent.

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