Friday, April 22, 2011

Greek restructuring options offer ugly choices

by William L. Watts


April 21, 2011

Restructuring, buybacks or bridge loans. When it comes to Greece, Europe faces a number of choices, none of them pretty, economists say.

A controversial 110-billion euro ($160.7 billion) bailout program was put in place a year ago next month. But expectations that the move to help the debt-strapped nation would allow Greece to return to credit markets next year, as originally planned, now appear dashed.

“The Greek debt chasm is still there. Given that Greece can’t eliminate its debt via economic growth or inflation in the near term, it would seem that debt rescheduling/restructuring is now inevitable,” wrote Simon Ballard, senior credit strategist at RBC Capital Markets, in a note to clients.

The Greek government continues to insist that restructuring isn’t an option. But speculation mounted as German officials last week appeared to be entertaining the notion of a voluntary move.

The fear, however, is that to get Greece’s debt load under control, a “haircut” or write-down of around 50% to 60% of the value of the nation’s existing loans may be required, according to Marc Ostwald, credit strategist at Monument Securities.

“That sort of haircut would get close to destroying the whole banking system” in Greece, where banks are loaded up on the nation’s sovereign debt, he said. It would also have consequences for German banks, which had an exposure of $26.3 billion to Greek public-sector debt as of the end of the third quarter of 2010, according to data from the Bank for International Settlements.

In the end, market patience could run out in coming months, economists Michala Marcussen and James Nixon at Societe Generale wrote in a research note.


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