Athens faced with Hobson’s choice

Financial Times
May 29, 2011

In the eyes of investors, Greece faces a dilemma – it has little choice but to default on its debt because of the parlous state of its public finances, yet such a move could only deepen its economic problems.

This explains the sharp rise in Greek bond yields, or the cost of the country’s borrowing, to the highest in the world for a big economy as Athens’ problems look intractable, not helped by divisions among policymakers over the way forward.

The new plan involving intervention in the country’s economy, an increase in loans by the international community and a voluntary extension of Greece’s repayment schedule to private creditors is therefore fraught with risks, say strategists.

First, a voluntary extension of Athens’ repayment schedule will be considered a default by leading rating agencies.

Standard & Poor’s has warned it will downgrade Greek debt to default, whether it is voluntary or forced – a so-called “rating event”.

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