A question of maturity: Talk of restructuring Greece’s debt is unlikely to solve the country’s economic woes

Economist
April 20, 2011

Sovereign-debt restructuring is a familiar story in the developing world but an untold one in advanced economies since the aftermath of the second world war. European leaders have desperately tried to maintain that record by providing bail-out funding to struggling euro-area members. Sheltering these borrowers from the markets gives them space to right their finances, the argument runs. Increasingly, however, the game looks up. A strong showing by the True Finns, a populist party, in Finnish elections on April 17th may derail a Portuguese bail-out. But the real problem lies where the euro-area crisis began, in Greece.

The Greek government still stoutly denies any plan to restructure its debt. The European Central Bank (ECB) is adamantly opposed, fearing havoc among European banks exposed to the countries in question. But the mechanics of a restructuring are now being pored over in Europe and at the IMF. In Germany both Wolfgang Schäuble, the finance minister, and Werner Hoyer, minister for European affairs, caused consternation earlier this month by openly raising the possibility of a debt restructuring. Markets take it as read: ten-year Greek government-bond yields hit a euro-era record of 14.6% on April 19th. Borrowing costs for other countries rose, too, Spain’s among them.

Why the shift in tone? The timetable set out in Greece’s rescue plan in May 2010, which provided €110 billion ($155 billion) in support from other euro-area countries and the IMF, expects it to raise about half its financing requirement in 2012 and to return fully to the markets in mid-2013. With yields where they are, and Greece’s debt burden approaching 150% of GDP, this looks ever more improbable. The upshot is that countries like Germany face the prospect of a further call on funds to keep Greece afloat. That looks politically unthinkable. Never mind that German banks benefit from Greece’s ability to keep paying its dues: German taxpayers hate the idea of again bailing out “feckless” Greeks. A new approach is therefore needed.

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