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Greek ‘End Game’ Veers to Debt Restructuring Risk: Euro Credit

Greece's finance minister George Papaconstantinou said that a restructuring is out of the question. Photographer: Jock Fistick/Bloomberg
Greece's finance minister George Papaconstantinou said that a restructuring is out of the question. Photographer: Jock Fistick/Bloomberg

Dec. 3 (Bloomberg) -- Greece risks having to restructure its debt even with an extension in terms of the loan repayments by the European Union as the economy remains mired in recession.

“You would be wrong to rule out the possibility of a debt restructuring at some point,” said John Stopford, the London-based head of fixed income at Investec Asset Management, who helps oversee $65 billion for clients. “Greece has a structural problem, and there has got to be risk we have another recession or economic crisis.”

The extra yield investors demand to hold 10-year Greek debt instead of benchmark German bunds is within 100 basis points of the record set in May when Greece was granted a three-year aid package of 110 billion euros ($145 billion) from the European Union and International Monetary Fund. In the Irish bailout announced Nov. 28, Greece received preliminary approval for an extra four-and-a-half years to pay back emergency loans. The country’s first aid repayment is due in 2013.

Underscoring the risks to bondholders, Standard & Poor’s said yesterday it may lower the credit rating on Greece, which is struggling to reduce its budget deficit from 9.4 percent of the gross domestic product. Finance Minister George Papaconstantinou said a restructuring is out of the question. The domestic economy probably will contract by 2.7 percent in 2011 and 0.1 percent in 2012, according to analyst estimates compiled by Bloomberg.

“The end game for countries like Greece and Ireland is still going to be a very high level of debt,” Stopford said.

Peripheral Yields

Borrowing costs among the region’s most-indebted nations climbed on Nov. 29 after Ireland followed Greece in accepting a bailout. The yield on 10-year Spanish bonds rose 25 basis points to 5.46 percent that day, while Italian yields jumped 22 basis points to 4.65 percent. Yields fell today as four traders with knowledge of the deals, who declined to be identified, said the European Central Bank bought Irish and Portuguese bonds. One said the central bank also bought Greek debt. The ECB declined to comment. The Greek 10-year yield declined 18 basis points today to 11.67 percent.

Europe’s sovereign debt crisis erupted late last year after Greece’s newly elected socialist government said the budget deficit was twice as big as the previous administration had disclosed. The sell-off of so-called euro peripheral bonds accelerated in October after German Chancellor Angela Merkel called for bondholders to share losses with taxpayers.

Speculation that countries may stop funding future bailouts intensified Nov. 16 when Austrian Finance Minister Josef Proell said he may withhold his country’s next payment for the Greek bailout if the government didn’t comply with financial targets. He later said Austria “won’t block” aid, saying his government wants “concrete figures” on Greece’s budgetary situation before transferring funds in January.

Revenue Shortfall

Greece’s budget revenue has so far failed to meet forecasts, with income rising 3.7 percent in the first 10 months of 2010. Higher sales, cigarette and alcohol taxes were introduced to boost receipts by 13.7 percent this year. That goal was trimmed to 8.7 percent in October and to 6 percent last month.

“Any extension of a repayment period would definitely be positive for Greece, although I still can’t rule out the possibility of a restructuring because fiscal slippage is a real risk,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. “The whole political support for Greece depends on whether they are able to meet the consolidation targets. A lot of things can happen in the next three years.”

‘Debt Restructuring’

If bondholders are forced to take so-called haircuts on their Greek investments, the earlier the details are known the better, said Spencer Jones, a partner at London-based Newstate Partners LLP, a sovereign debt specialist whose clients include Russia, Congo and Antigua. The more Greece draws from the rescue package, the deeper the potential losses should a debt reorganization be required, he said.

“My view is that Greece might be able to avoid a debt restructuring, but that view clearly isn’t shared by some investors in the market,” Jones said. “With the bailout they got from the so-called Troika, those creditors would generally be considered preferred creditors.”

The EU and IMF approved the aid package on May 2 in exchange for the Greek government agreeing to cut public-sector wages and pensions, and raise taxes after a surge in bond yields shut them out of the capital market. The Greek government has so far received 29 billion euros of funds.

S&P said it is assessing credit implications of the so-called European Stability Mechanism that may govern European Union sovereign bonds beginning in July 2013. The ratings company said in a statement from Madrid that it put Greece’s BB+ long-term sovereign rating on “CreditWatch” with negative implications.

French Yields

Greek bonds are the worst performers in Europe this year, having dropped 19 percent, followed by a 15 percent decline in Irish debt and an 8.6 percent slide for Portuguese bonds, data compiled by Bloomberg and the European Federation of Financial Analysts Societies show.

The yield difference, or spread, between 10-year Greek bonds and German bunds was 875 basis points today, down from a record 973 in May.

Bailouts for Ireland and Greece and speculation that Portugal and Spain also may require funds are prompting investors to shun some of Europe’s highest-rated bonds. The yield on 10-year French securities rose to as much as 3.31 percent this week, the highest in almost seven months, while the extra yield investors demand to hold 10-year Belgian bonds instead of similar-maturity bonds climbed to the most since at least 1993.

“What’s worrying is that it’s not clear what will turn the sentiment around,” Investec’s Stopford said. “The market will still be in a risk-off environment for a while.”

To contact the reporter on this story: Anchalee Worrachate in London at

To contact the editor responsible for this story: Daniel Tilles at

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