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Greek Debt Restructure a ‘Necessity’ Without More Aid

Greece’s request for a $60 billion bailout doesn’t reduce the risk of default next year and a debt restructuring will be a “necessity” without even more aid, according to Evolution Securities Ltd.

Greek bonds tumbled today, driving the premium investors demand to hold the nation’s 10-year notes rather than German bunds to a record 6.36 percentage points. Finance Minister George Papaconstantinou said yesterday investors will “lose their shirts” betting against the nation as the European Union and International Monetary Fund rescue will prevent a restructuring.

Greece’s finances remain “stretched in the medium term, even if the promised support provides some relief in the short term,” said Gary Jenkins, Evolution’s head of credit strategy in London. “EU/IMF funding is only sufficient for about one year, and unless the amount made available to Greece is increased significantly and/or market sentiment does a U-turn, a restructuring looks like a necessity.”

The cost of insuring the nation’s debt against default increased 4.5 basis points to 619, according to CMA DataVision prices for credit-default swaps. A basis point on a swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year.

Borrowing Needs

Greece borrowing requirements for this year total 45 billion euros ($60 billion) as it struggles to return its deficit below the EU’s 3 percent limit by 2012, Jenkins said. It has already raised 18 billion euros through bond sales, leaving it with 27 billion needing to be financed over the rest of 2010, he said.

Prime Minister George Papandreou asked last week for a 45 billion-euro aid package agreed with the EU and IMF to be activated.

Greece will get about nine months of “breathing space” if the full bailout is put into effect, according to Citigroup Inc. analyst Mark Schofield.

“On the face of it, a restructuring, a rescheduling or an external prop for the debt looks unavoidable,” Schofield wrote in a client note. That “could trigger rapid contagion that would cause a much graver problem should Spain, Portugal and Ireland be impacted,” he wrote.

Even with the international rescue package, Greece’s funding needs over the next two years will be “at least as high as this year’s as higher redemption payments offset the planned reduction in the deficit,” said Jenkins.

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