GREEK OFFICIALS denied again yesterday that some form of debt rescheduling was imminent as sources within the German government said Athens was likely to do so before the end of the summer.
Financial markets are increasingly convinced Greece will have to renegotiate the terms of its public debt, recognising that its economy cannot grow fast enough to service a burden that is set to swell to 160 per cent of national output.
German government sources said yesterday that Athens, which is struggling to impose national belt-tightening aimed at regaining creditors’ faith, would not avoid opting for a restructuring before the end of the summer.
But officials have repeatedly insisted that such a move would prove costlier in the long run and Bank of Greece governor George Provopoulos told shareholders last Thursday it would hurt banks and pension funds, and shut access to capital markets.
“The Bank of Greece has explained with clarity since last October that such a (restructuring) option is not necessary, nor desirable,” he said. “It would have catastrophic consequences.”
The government denied a Greek newspaper report that it wanted to extend maturities on its outstanding debt, echoing dismissals from EU and IMF officials.
But both that report and the signals from Germany served to convince investors something was in the pipeline, hitting debt markets and the euro yesterday and keeping yield spreads of Greek government paper over German bunds near record highs.
“Decisive voices within the federal government expect that Greece will not make it through the summer without a restructuring,” one high-ranking German coalition source said.
The 10-year market interest rate on Greek debt rose to a record 1,135 basis points, higher than peaks last year when Greece asked its EU and IMF partners for a €110 billion bailout.
To return the country to a sustainable path, most economists agree it needs to wipe away roughly half the value of its outstanding debt, hitting private creditors with significant “haircuts” on their holdings.
But EU leaders have promised not to make private debt holders pay before 2013. Doing so in the near-term could set off a wave of contagion that engulfs Greek, German and French banks, raises pressure on Portugal and Ireland to restructure and infects bigger euro zone members like Spain.
Greek sovereign debt holdings of Greek lenders are estimated at around €49 billion, with the country’s two largest banks alone holding about €20 billion. Haircuts would hit banks’ equity capital.
Pension funds, already straining from an ageing population, also face a major potential hit as they hold about €8 billion worth of Greek bonds.
“I think an extension of maturities is more likely than a haircut,” said analyst Antoine Burgard at Natixis in Paris. “There is no direct impact on profit and loss but it means an impact on liquidity because banks would get the money later.”
Worries over the prospect of a restructuring sent the cost of insuring Greek debt against default higher yesterday, with Portuguese, Spanish and other lower-rated euro zone government debt coming under pressure.
Plans by the government to sell stakes in key state firms to raise proceeds to pay down public debt, laid out last week, have prompted a strike call by private sector union GSEE on May 11th.
The government is facing increasing pressure from a public fed up with austerity as it prepares a new wave of measures.
Earlier yesterday a finance ministry official denied a report by daily Eleftherotypiathat the country had already requested restructuring talks with the EU and IMF and the government spokesman ruled it out. – (Reuters)
