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A 'Soft' Restructuring for Greece?

Friday, 20 May 2011 | 4:40 PM ET

We often get a frenzy of negative Europe speculation on a Friday afternoon either from fear of what might emerge over the weekend or mischief-making by Dollar-bulls. And today is no exception. Skeptics question how the Greek government can afford to borrow at 25% on their 2-year bonds. For now that's totally irrelevant; the Greeks don't need to borrow this year—nor probably next.

Euro coins
AP
Euro coins

What Greece needs is for the IMF, ECB and EU teams currently on the ground there to agree that it's sufficiently grinding-down on its people with austerity—plus enough privatizations—to get them to OK the next slice of the $160 billion loan package agreed to last year.

The ECB is especially desperate to get the Greeks to make their public finances sustainable, but also to maximize discipline across the Euro Zone, i.e. Ireland. This is because the ECB knows that if more than one of the PIIGS defaults, it could overwhelm the Euro Zone, certainly the solvency of the ECB. That's why you see headlines about divisions between the ECB and the (softer) IMF.

At some point in the future the ECB will probably orchestrate a 'soft' restructuring for Greece; extending maturities to lower monthly bills but simultaneously maintaining the face value on the debt so that the French and German banks that own it don't have to write it down. But the game is to delay that—in order to maximize austerity now—and because new Euro Zone systems coming in 2013 will make it easier.

These is a fresh debate this week about whether insurance contracts—credit default swaps—would pay-out in the event of a 'soft' restructuring. And that's ignited wider suspicions that write-downs of some sort may be inevitable on Greek debt owned by the French and Germans.

There are also concerns in Spain that politicians elected to office in Sunday's regional and local elections could reveal an extra $40 billion of bad debt hidden by their predecessors.

But in essence nothing has really changed. Europe still lacks a comprehensive solution and the fear of crisis is ever-present.