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Greek Bondholders Unlikely to Get Repaid in Full, Goldman Says

Greek Bondholders Unlikely to Get Repaid in Full, Goldman
Greece spawned the euro-region sovereign debt crisis a year ago when investors became concerned spending cuts wouldn’t be enough to bring down the country’s budget deficit. Photographer: Kostas Tsironis/Bloomberg

Greek bondholders are unlikely to get all their money back on schedule unless borrowing costs fall, said Andrew Wilson, head of fixed-income at Goldman Sachs Group Inc.

“Unless we have a dramatic change in the interest-rate structure, particularly for a country like Greece, I think some form of restructuring is a relatively high-probability event” after 2011, Wilson said in Bloomberg Television’s “On the Move with Francine Lacqua.”

Greece spawned the euro-region sovereign debt crisis a year ago when investors became concerned spending cuts wouldn’t be enough to bring down the country’s budget deficit, which was more than three times the limit laid down by the European Union. Greece’s 110 billion-euro ($149 billion) bailout in May failed to stop its bond yields surging, infecting other so-called peripheral nations including Spain and Italy.

The crisis in the euro region’s most indebted nations “gives a lot of investors jitters,” said London-based Wilson, who joined Goldman Sachs in 1995 and was made a partner four years ago.

Bringing funding costs down “is either happening through time and the fiscal austerity -- markets are not being very patient around that -- or we get some direct intervention,” he said. “That’s what we’re waiting for: is the European Central Bank going to come up with something?”

The Frankfurt-based ECB is supporting nations including Greece, Portugal and Ireland by buying their bonds, while European governments are considering reducing the interest rates on rescue loans in exchange for new guarantees.

Greek Buybacks

Germany is meanwhile weighing a plan to help Greece reduce its debt burden by letting it buy back bonds using funds from the 440 billion-euro European Financial Stability Facility, Die Zeit reported. Officials of both countries denied a restructuring of Greek debt was being discussed.

“It’s the uncertainty, really, that’s creating the problems at the moment,” Wilson said. “It feels a bit like a standoff here between the authorities, be it the ECB or European governments, and investors, saying, ‘well, are we willing to lend money to countries like Portugal and Spain?’”

Investors are demanding 8.39 percentage points to own Greek 10-year government bonds rather than benchmark German notes, compared with as low as 2.15 percentage points in January 2010, according to data compiled by Bloomberg. The yield on Portugal’s 10-year debt has hovered above 7 percent since November, while Spain’s bond yields are the highest in 11 years.

‘Can’t Sustain 7%’

“You can’t sustain 7 percent interest rates” with peripheral nations’ budget deficits as high as they are, said Wilson. Still, measures including the EU rescue fund “mean countries like Greece don’t need to come to the market” to sell new bonds, he said.

Greek Prime Minister George Papandreou’s financial lifeline forces the government to reduce its deficit to below the EU’s limit of 3 percent of gross domestic product a year after that. The country’s budget gap was 9.4 percent in 2010, according to a government estimate.

Greece lost its last investment-grade ranking on Jan. 14 when Fitch Ratings cut it to junk because of its debt burden. The country had to pay out a third of its tax take in the first half of last year just to service the interest on its debt, according to data from Eurostat, the EU’s statistics office.

“There’s a lot of worry around the peripheral European nations, not just Spain, but Portugal, Ireland,” said Wilson. “All of those countries are under enormous pressure.”

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