Greek Debt Pressured by Restructuring Speculation

Investor confidence in Greece wanes as a default on government debt obligations is all but imminent. Government officials deny reports that a strategic default is in the works, but remarks from Germany’s finance minister Wolfgang Schaeuble suggest a default is probable. His comments spooked markets, sending Greek bond yields higher. Greek budget austerity measures imposed last year have failed to hit desired deficit reduction targets. Worse yet, these measures are rolling back the welfare state at a time of high unemployment and grinding poverty.

By Mark Brown and Terence Roth

Wall Street Journal
April 14, 2011

Fresh speculation that Greece faces a debt restructuring—fueled by a German government minister's interview—put Greek government bonds under pressure Thursday.

Bond prices fell and the cost of insuring Greek government bonds against default jumped after two days of warnings from officials and top economists that Greece's debt burden could become unsustainable, despite a European Union bailout package.

German Finance Minister Wolfgang Schaeuble, in a question and answer interview with the Die Welt newspaper, held out the possibility that a June audit might show that Greece won't be able to overcome its debt load without relief. Mr. Schaeuble said "other steps" might need to be taken, without suggesting directly that Greece might need to restructure its debt.

"I am awaiting a detailed analysis of Greece's debt sustainability [in June]," Mr. Schaeuble was quoted as saying, referring to a report that also will go to the European Commission and the European Central Bank.

"Should this report conclude that the debt sustainability is in doubt, something will have to be done" he said.

Greek officials so far have ruled out the need to restructure their debt and European officials have avoided the subject, as such talk would cast doubt on recent bailout plans and could generate investor distrust in European government-bond markets.

Asked specifically whether this meant a debt restructuring, Mr. Schaeuble referred to new rules under the EU's permanent-bailout system beginning in 2013 that will require investors to share bailout burdens. "Until then a restructuring would only be on a voluntary basis," Mr. Schaeuble told Die Welt.

Greek and Portuguese government bonds fell on the news that Greek could be struggling to pay its debt, pushing yields sharply higher. The euro slipped to the day's low of $1.4401 against the dollar as investors saw an opportunity to take profits on recent gains.

Yields on the two-year Greek bond surged 0.88 percentage points to 17.12%, while yields on the five-year bond rose 0.8 percentage point to 17.18%. Yields on the 10-year Greek bond rose 0.22 percentage points to 13%.

Separately, two Greek officials Wednesday said Greece missed its revised deficit targets by more than a full percentage point of gross domestic product last year, which will force the government to adopt billions of euros worth of new austerity measures to bring its budget back on track for this year.

Portuguese bonds also came under pressure as investors sold holdings of bonds issued by debt-laden euro-zone countries, with the yield on the 10-year bond rising 0.17 percentage points to a euro-era high of 8.935%.

In a search for new steps to help Greece, Mr. Schaeuble warned that a restructuring would set a precedent in the EU government bond market.

"Imagine that you are a fund manager in the U.S. or Asia and you read that euro bonds are no longer safe, then you don't care whether they were Greek or German," he told Die Welt.

ECB executive board member Lorenzo Bini Smaghi also warned in an interview Thursday that a Greek debt restructuring would cripple much of the country's banking system.

He told the Italian newspaper Il Sole 24 Ore that investors need confidence for Greece to return to the market and that talk about debt restructuring will keep investors away.

"According to our analysis, a debt restructuring would result in the failure of a large part of Greece's banking system," Mr. Bini Smaghi told the paper.

Greek banks would lose access to ECB refinancing, hurting lending to households and businesses as well as individuals and pension funds, he said. "The Greek economy would be on its knees."