For weeks the market has been awash with rumors and reports on the timing and chances of a Greek debt restructuring that could have big implications both for banks holding that debt and the governments that would be forced to clean up the mess a default might create.
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The Parthenon in Greece
The story has followed a similar path to the wider euro zone debt crisis so far. The Greek government refuses to accept that a default is inevitable.
Euro zone politicians refuse to go on record and say such a move is inevitable and off the record brief the press saying talks over such a move are under way and a restructuring is now a matter of how and when, not if.
For those like Carl Weinberg, the chief economist of High Frequency Economics that called for such an outcome 12 months ago, the sense of inevitably now dominating the market is a vindication of his foresight and a sign that further delay of the inevitable will create dangers that outweigh the risks of simply getting on with it and agreeing on an orderly default.
“Restructuring is not unthinkable, it is inevitable,” Weinberg wrote in a note to clients on Tuesday.
“The market speculation that Greece is on the verge of default is a bet that a third consecutive failure to meet quarterly quantified fiscal targets will strain the IMF’s ability to look the other way and disburse funds,” Weinberg added.
With opposition to the bailouts of Greece, Ireland and now Portugal rising fast in the euro zone’s prosperous north, Weinberg warns Greece and those overseeing its economy to get on with it, fast.
Restructuring, a Favor for the Euro Zone
“Our conclusion a year ago was that a multi-year restructuring of the next decades worth of Greek sovereign debt maturities into single 25-year self-amortizing bond would lower the yearly gross financing requirement into a manageable 11 billion euro ($15.95 billion) per year, without a ‘haircut’ for investors.”
“If Greece were to balance its operating fiscal budget so as not to incur new debts, this payment stream would be fixed and affordable. The same conclusion holds today, except the year’s delay and new borrowing boosts the yearly debt repayment to 14 billion euro’s per year without a haircut,” said Weinberg.
By forcing a restructuring now Weinberg believes the market would be doing Greece and the euro zone a big favor.
”The longer Greece waits before, the more the plan will cost…and the greater the odds of a haircut for bondholders,” he explained.
Others like Robert Barrie, the head of economic research at Credit Suisse in London believe the prospect of restructuring should not be seen as a major negative by investors.
“The direct impact of a restructuring of peripheral sovereign debt on banking sectors outside the periphery should not be too significant,” said Barrie in a research note.
“Core holdings of peripheral government debt are relatively light. But, to the extent to which a peripheral debt restructuring could have negative implications for the banking sector of the economy involved, then the linkages look more significant and capable of causing financial – and possibly economic – impact outside the periphery,” he wrote.
Germany is the nation most at risk, according to Barrie, given the exposure of its banking system.
But the authorities in Berlin are likely to view the cost of any fallout from a Greek restructuring as being lower, in both monetary and political terms, than throwing more good money after bad holding up the Greek economy and its embattled peers like Ireland and Portugal.
