April 19, 2011
European investors and politicians prodding Greece to restructure its debt may end up wishing they hadn’t.
Talk of restructuring spurred by Germany risks re-igniting Europe’s debt crisis, enveloping Spain just weeks after European leaders said bailouts of Greece, Ireland and Portugal ended contagion. Under a Greek default, Europe’s financial system would strain as banks in and outside Greece and holders of Greek bonds, such as the European Central Bank and domestic pension funds, tally losses.
“By restructuring Greek debt you also may precipitate a crisis in Spain,” David Watts, a strategist at CreditSights Inc. in London, said in a telephone interview. “At that point it doesn’t matter how much you’ve saved by restructuring Greece, the fallout from Spain is much greater. The issue comes back to not knowing the ultimate cost.”
Speculation by German officials that Greece may run out of alternatives to restructuring underscores their reluctance to spend more on bailouts, while ignoring precedent. Sovereign financial crises usually don’t come in isolation. Thailand’s 1997 devaluation triggered the Asian crisis, Russia’s 1998 default set off a global financial pandemic and Latin America required the U.S. to develop Brady bonds as a virtual guarantee.
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