Greek Restructuring Isn't Straightforward

by Richard Barley

Wall Street Journal
May 3, 2011

Markets are betting on a Greek debt restructuring sooner rather than later, with yields on bonds maturing in 2012-2014 at sky-high levels as a €27 billion ($40.04 billion) funding gap looms in 2012. But a restructuring might be harder to achieve than some suggest.

First, an involuntary restructuring, forcing bondholders to take a haircut on their debt, is extremely unlikely. An outright default would pose huge risks to both the Greek and wider euro-zone economy, including the still-fragile banking system. The European Central Bank, now a major creditor of peripheral European economies thanks to its bond purchases, violently opposes any restructuring fearing a bond market meltdown.

A default would also be politically unpalatable given the euro-zone's commitment that any restructuring prior to the introduction of the European Stability Mechanism in 2013 would be voluntary. Plus a haircut would trigger credit default swaps—and thereby reward investors whom politicians have previously condemned as speculators.

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