Greek Restructuring: Off the Table, Not Off the Menu

The complexity of European politics should prevent any reprofiling of Greek debt this year, according to a political analyst, but markets are still waiting for any sign of a prospective default.

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French finance minister and prospective International Monetary Fund head Christine Lagarde said it "was off the table". Acting IMF managing director John Lipsky said the fund "does not contemplate" it.

Senior politicians and policymakers have kept up a steady drumbeat of refusal, but the market keeps on waiting for signs that Greece will default, with investors constantly on a hair trigger.

On Friday May 20 the market reacted to aday-old, recycled release from the Norwegian foreign ministry, which suspended a $42 million grant for social projects, alongside an anticipated downgrade of Greek debt by Fitch.

In the context of the country's 110 billion euro ($158 billion) IMF/EU bailout, $42 million may be pocket change, but where information is so scarce and coherent voices from policymakers even scarcer, the markets are trading off whatever they can get, analysts say.

Rating agency Fitch on Tuesday clarified that downgrade of Greek debt to B+, saying that the scale of the challenge ahead of the country's government and its ability to deliver "in the face of rising implementation and political risk is increasingly in doubt."

The country is likely to face a funding shortfall in 2012, Fitch said, and the EU heads of government summit in March, "heightened this risk still further, by raising market expectations of the inevitability of some form of debt restructuring under the auspices of the newly created European Stabilisation Mechanism."

Investors certainly seem to think that a restructuring is inevitable. However, an examination of the "political constellation" behind the decision-making process would suggest that the group is unlikely to accept default, or even softer restructuring, before the end of the year, Mujtaba Rahman, Europe analyst at Eurasia Group, told

While Germany has been quietly pushing for some kind of restructuring in the short term in order to prevent a full default and protect the interests of its banking sector, which is heavily exposed to Greek debt, the European Commission and ECB remain opposed, along with influential core nations, including France.

"That divide within the influential camps means I don't think we're going to get movement on the Greek question this year," Rahman said.

On Tuesday, the German position appeared to have softened, according to a Wall Street Journal report, as the EU tried to hammer out its second bailout package for Greece.

In the short term, the European Commission will put its weight behind the structural adjustment program that is a condition of Greece's bailout, he believes.

"The IMF, the ECB are on the same page with that, so I think that what we're going to see for the following year is an emphasis on the privatization process, an emphasis on tax administration," Rahman said.

Observers are more optimistic about spending cuts than they are about revenue collection in Greece, which has had endemic issues with tax avoidance.

"On the revenue side, there is still a big lack of real commitment because of bureaucratic, legal, human capital constraints on the side of the Greeks to really make a dent and improve revenue performance, and that's what the Commission is looking at over the course of this new program," Rahman said. "I would be surprised, certainly, if over the course of this year you were to see a change in the Commission's position on this. I think their emphasis is on the adjustment program and to let this play out."

Politically, the prevailing wind now seems to be moving against a restructuring in 2011. However, as Andrew Bosomworth, head of portfolio management in PIMCO's Munich office, told, there are forces outside of the control of policymakers.

"Politicians are not a homogenous group, they have many different views among them. That's one of the reasons why we see this back and forth. Politicians and policymakers… they control many things but not everything, and one thing they cannot control is the behavior of crowds," Bosomworth said. "If we were to experience, for example, an exodus of deposits from Greek banks, or ongoing mass protests against austerity or the privatization plans, those are things that could derail even the best intentions of politicians to avoid default."

Bosomworth is unconvinced that policymakers will simply wait and see.

"[structural adjustment] has been going for a year, and I think this is where the pro-restructuring group come in. They're 12 months into the program, the data is supportive of the view that it is not working, therefore another approach is needed," he said. He added however: "I think those who oppose restructuring would say 'give it a chance', and there is an element of truth to that. There is a certain option value to waiting. Who knows, time could allow it to work out under some very optimistic circumstances."

"The country is capable of repaying its debts if it wants to. But to do so, it needs to privatize a large amount of assets, 50 billion euros is not enough, and it needs to raise a lot more tax revenue while controlling spending without completely destroying economic growth. Achieving that will require a large sacrifice on behalf of Greek society, and that is where the unpredictable nature of crowd psychology will play a roll in the outcome," Bosomworth said.