Financial Times
October 21, 2011
As the Greek debt crisis has escalated, so have calls to restructure the country’s public debt, in order to support debt sustainability, improve long-term growth and reduce moral hazard. In fact, though, the likely financial benefits of debt restructuring would be much smaller than is often envisaged, the process entails significant risks for Greece and the euro area.
The benefits of a sovereign debt restructuring by a eurozone country depend on the distribution of debt across creditors and their capacity to absorb such losses without government support. However, there are also funding constraints and financial interlinkages, stemming from the functioning of the European monetary union and the integration of financial markets, that can erode benefits and generate systemic risks.
In the case of Greece, the nominal value of outstanding central government debt was €366bn at the end of July 2011. Almost 30 per cent was held by Greek residents, mostly banks, pension funds and insurance companies. A substantial reduction in the nominal value of Greek debt held by these institutions would have to be largely offset by government financial support. Losses sustained by Greek households and non-financials holding public debt would hit economic activity and tax revenues.
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