April 18, 2011
As the eurozone approaches the first anniversary of the bail-out of Greece, fears of a debt restructuring are intensifying. It was seven years from the start of the Latin American crisis in the 1980s to the first wave of restructuring. Could Europe go even faster?
Recent action in the markets suggests a certain hysteria that it could. Yields on Greece’s three-year bonds surged to more than 20 per cent on Monday, up more than 1 percentage point on the day and nearly triple their October levels.
Government borrowing costs“The markets clearly think it is now when, not if, the Greeks will default,” says Don Smith, economist at Icap.
The fire has been stoked by comments by German officials about the possibility of a restructuring of Greece’s huge debt, something European policymakers have hitherto denied any need for.
But many investors, in spite of acknowledging that Greece will clearly have to restructure its debt, believe there is little likelihood of it happening soon. Top of their list of reasons is a belief that having launched bail-outs of Greece and Ireland to avoid a restructuring, it would be premature for the European Union to backtrack so quickly.
“The only reason you would have a restructuring of Greece imminently is if the political situation merited it. Having committed well over a trillion euros trying to solve this in the past year it seems odd to throw in the towel now,” says Jim Reid, credit strategist at Deutsche Bank.
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