Greece's public finances remain in a perilous state
BRUSSELS - AFP
Once taboo, a restructuring of Greece's massive debt no longer presents a red line for some eurozone governments intent on preventing the sort of messy defaults that once rocked
After months of warning that chaos would follow a restructuring, a "soft" version is now being presented by some within the eurozone as a lesser evil to save Greece once more from potential devastation.
European finance ministers crossed a line this past week by indicating a willingness to reschedule repayments on Greece's 110-billion-euro EU-IMF bailout, provided private investors agree to share the pain.
This, they say, would keep Greece well clear of the catastrophe that befell Argentineans in 2001 when the country defaulted on its debts.
Argentina got out of that mess by devaluing its peso by some 70 percent, but Athens doesn't have that option as it is anchored in the eurozone.
The hope is an orderly and voluntary rescheduling can help avoid a restructuring in which investors would be forced to accept losses.
"If the alternative is losing out at the end of the day because Greece doesn't have the means to repay its debt, banks won't have any other option," said Ferdinand Fichtner of German analysts DIW.
Previous EU-IMF aid to non-euro, ex-Soviet EU states such as Hungary also demanded parallel private sector adjustment -- indeed, that approach is a core demand made by Germany for all future bailout programmes under a post-2013, 750-billion-euro European Stability Mechanism due to be settled next month.
Despite unprecedented belt-tightening, Greece's public finances remain in a perilous state with a 2010 deficit sharply revised upward to 10.5 percent of national output and a worse-than-expected recession hitting its tax take.
The upshot is that Greece can no longer envisage returning to commercial money markets next year to find the 30 billion euros it needs to refinance its debts.
Whatever the amount of additional aid Athens gets from the EU and IMF, it is under intense pressure to sell off 50 billion euros' worth of public assets. They want Greece to achieve around a third of that target this year and next while avoiding even greater social unrest.
Privatisation is seen as essential to overcoming opposition to a rescheduling from the European Central Bank and, to a lesser extent, France.
Banks, investment and pension funds big and small stand to lose under a rescheduling, and would lose even more in any restructuring that forced investors to accept losses.
But many may already have withdrawn what they could, with the ECB having bought up billions of Greek bonds as part of its efforts to keep debt markets functioning.
Jean-Claude Juncker, head of the Eurogroup of finance ministers, spoke this past week of "soft restructuring," what EU economic affairs commissioner Olli Rehn termed "reprofiling or rescheduling on a voluntary basis."
If rigid respect of existing credit agreements is no longer realistic, the question is how far on the sliding scale of debt write-off will Europe go.
The idea is that by giving Greece more time, and perhaps a lower rate of interest over the longer timeframe, the chances of getting back a higher proportion of what is owed may improve.
RBS specialist Jacques Cailloux maintains that "markets are only likely to respond when new cash is put on the table rather than to new political commitments."
The EU and IMF have already committed to more than 250 billion euros ($350 billion) in aid for Greece, Ireland and Portugal, but fresh funds carry electoral health warnings for governments after voter backlashes such as the one in which the anti-EU True Finns scored big gains in Finland last month.
However the ECB remains dead set against any debt rescheduling or restructuring, believing it could have unintended consequences that ripple throughout the eurozone and cause irreparable damage to the single currency.
The ECB's chief economist warned on Wednesday that it might be forced to reverse its policy that allows Greek banks to borrow ECB funds by putting up Greek sovereign bonds as collateral. After successive downgrades, those bonds would not normally qualify.
Such a move would pull the rug out from under Greek banks, which had nearly 90 billion euros in ECB funding at the end of March