Greek Writedown Won’t Cut ‘Unbearably High’ Debt, IfW Says

Greece’s creditors won’t help the country get a handle on its debt by taking losses on sovereign bonds, according to the Kiel Institute for the World Economy.

Greece’s debt load will be “unbearably high” even if public creditors join investors in taking 50 percent writedowns on the debt, the institute at the University of Kiel in northern Germany said in a study published on its website.

Creditors agreed with European leaders last year to take losses on Greek debt and swap their notes for bonds with longer maturities to help rescue the country. Euro area governments are now seeking to fill a deeper-than-expected hole in Greece’s finances by saddling investors with lower interest rates on exchanged bonds.

The original declaration of intent by bondholders probably won’t be implemented in full because of its voluntary nature and “vague comments” on its realization, said the institute, known as IfW in Germany. Greece will probably require bond losses of more than 80 percent, which would move it “close to the region of complete insolvency,” the institute said.

Portugal will probably need the value of its debt to be reduced by as much as half while Ireland, Italy and Hungary won’t require losses on their sovereign bonds as long as they can post “high” economic growth rates, according to the IfW.

The IfW is one of four institutes that provide twice- yearly, joint assessments of the economic outlook for the German government.

What follows is a table showing necessary sovereign-debt losses of selected European countries, according to the IfW’s model under 2 percent and 4 percent long-term gross domestic product growth.

Country               2% GDP Growth     4% GDP Growth
France                0%                0%
Germany               0%                0%
Greece                83.77%            81.87%
Hungary               14.81%            0%
Ireland               30.05%            0.28%
Italy                 13.41%            0%
Portugal              55.62%            45.84%
Spain                 0%                0%

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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