The Greek debt headache

Debt restructuring to save Greece: although it has yet to achieve a consensus among economists and governments, little by little the idea is gaining ground. The European press argues that the main priority should be to find a sustainable solution.

Published on 18 May 2011 at 14:01

On 17 May, the finance ministers of the Eurozone paved the way for a restructuring of Greece’s debt with the announcement of a euphemism: “reprofiling.” The term, which has been chosen to avoid scaring Greece’s creditors, is a signal that Eurogroup could opt for what the front page of Handelsblatt describes as “light restructuring.”

The business daily explains that there are four possible options for dealing with the Greek crisis:

- further loans to enable Greece to restore economic growth, in other words a continuation of current policy which economists have judged to be unrealistic

- a “soft restructuring” in which bond holders voluntarily accept a delay in the reimbursement of loans and lower interest rates

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- a harder restructuring, in which they will be forced to accept a haircut

- or, the last option, which is Greece’s exit from the Eurozone.

For the bond holders, the countdown to participation in restructuring, which will imply the writing down of losses, has begun, remarks Handelsblatt. Even the German government has commenced talks with banks, insurers and other holders of Greek bonds.

“Deutsche Bank has privately accepted to take a 20% to 30% haircut [...] and is prepared for these losses. [...] But this light restructuring — and there is no consensus among member states for a more radical solution — will inevitably pave the way for harsher measures. Only a very few economists are now recommending a partial write-down of the debt.

Fraught with uncertainty, the current situation “is a test of investors’ patience,” remarks Financial Times Deutschland. But for another major German business daily, the plan for a “soft” debt restructuring failed even before it was adopted.

An extension of Greece’s debt maturities will not alleviate the financial burden on the country to a point where the problem will be solved. We cannot expect much from the Greeks. On visits to Berlin and Brussels, the [Greek] government has shown a propensity to pledge further savings, but it has hardly any chance of succeeding. Instead of relying on the Greeks, we should count on other European states — and in particular on Germany. What is required is a clear affirmation from these countries to the effect that they are taking the Greek bailout seriously and there will be no hard restructuring: then and only then will the confidence of investors on financial markets be restored. For this to happen, we will need to see further loans, and most importantly loans that do not have high rates of interest.

In Athens, the ongoing discussions are a subject of serious concern. In a front page article, Ta Nea reports on "the European consent gamble:" an EU stipulation that a further loan of 50 to 60 billion euros will be conditional on the conservative opposition’s consent to austerity measures, which has prompted columnist Giorgos Papachristos to remark that "Brussels is playing with fire.”

For the first time Eurogroup President [Jean-Claude Juncker] has spoken of a possible restructuring of the debt, but before that happens there will have to be more measures: more privatisations and most importantly the consent of the conservative opposition. In insisting on its requirement for the consent of the political class, Brussels has imposed a condition. But if it fails to obtain it, we will have early general elections.

In London, the urgent need to find a solution has been underlined by The Guardian, which believes that Greece could be “the next Lehman Brothers,” the bank whose 2008 collapse triggered the financial crisis. Journalist Larry Elliot examines two possible approaches:

The first is to turn monetary union into political union, creating the budgetary mechanisms to transfer resources across a single fiscal space. That would fulfil the ambitions of those who designed the euro, and would recognise that the current halfway house arrangement is inherently unstable. The second would be to admit defeat by announcing carefully crafted plans for a two-tier Europe, in which the outer part would be linked to the core through fixed but adjustable exchange rates. Neither option, it has to be said, looks remotely likely, although the collapse of Lehmans shows the limitations of the current muddling-through approach. The eurozone's future will not be decided in Athens or Lisbon but in Paris and in Germany. Both the big beasts have invested vast stocks of political capital in "the Project", and insist that there will be no defaults and no departures from the club.

In Madrid, El País note notes:

The paradox of fiscal adjustment which has been torture for Greece and could soon be an ordeal for Ireland is that the required austerity measures tend to limit growth and thus act as a brake on the repayment of the debt of the bailed-out country. There is only one way out of this impasse: adjustment and reforms have to be accompanied by a radical cut in salaries in the bailed-out country. Brussels has to deal with the risk that Ireland and Portugal will soon follow in the footsteps of Greece. But one thing is certain, and that is that Berlin and Paris cannot accept the failure of the Greek bailout. And in the interests of avoiding a demoralising precedent, they have begun to show some 'understanding' of the need for an additional Greek bailout.

However, in Amsterdam, lawyer and historian Thierry Baudet and economist David Hollanders point out in De Volkskrant:

The majority in the Netherlands, Germany, Great Britain and Finland – citizens who cannot be sidelined in a democracy – have absolutely no confidence in Greece’s solvency. (…) To avoid future recurrences of this type of crisis, [Dutch economist] Harrie Verbon argues that we will have to establish a ‘powerful agency’ to impose budgetary discipline. (…) Little by little, we are heading towards a United States of Europe. But is that what we want? If that is the price we have to pay for the single currency, then it is perhaps too high.

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