Tuesday, January 25, 2011

Odds Are Against a Greek Debt Restructuring

Reuters/New York Times
January 24, 2011

Conventional wisdom in the financial markets says that Greece will never be able to repay its growing mountain of debt and would do better to do an orderly restructuring sooner, rather than later.

But do not expect Athens to seek relief from its creditors anytime soon. All three major credit ratings agencies have downgraded its sovereign bonds to junk status. The risk fee that premium investors charge for holding Greek debt rather than benchmark German government bonds stands at more than eight percentage points.

“Greece will not be able to service its debt. The sooner that is recognized, the better it will be for all parties involved,” Hans-Werner Sinn, president of the German economic research institute Ifo, said last week.

“Therefore,” Mr. Sinn added, “Greece should come to an agreement with its creditor banks about a restructuring of its debt in which the banks renounce a part of their claims.”

But it is far more likely that euro-zone partners and the International Monetary Fund will give Greece longer to repay its emergency loans, reduce the interest rate and buy back Greek debt on the secondary market to avoid such a solution, which is termed a haircut for bondholders.


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