Can Sovereign Restructuring Hold The Line At Greece?

The EU will not be able to hold the restructuring line at Greece.

Greece was always expected to be the problem child among the EU nations that needed bailouts or had severe financial problems. Rumors that its initial aid package would be inadequate have spread through capital markets for months. Greece does not seem to have the ability to reach austerity goals or GDP growth benchmarks. Some outsiders believe the nation’s population has rejected austerity which the central government cannot fight.

The papers are full of rumors and news reports that the EU will extend the time which Greece has to repay its current bailout obligations of $158 billion. That decision is based on a set of analyses that the southern European country cannot cover principle repayment and debt service. “We think that Greece does need a further adjustment programme,” said Jean-Claude Juncker, Luxembourg’s prime minister and chairman of the eurogroup of finance minister, said according to the FT.

The decision will open a Pandora’s Box of similar financial demands in Ireland. The Irish Mail reported that the country would have to reset its debt in two years. In the same edition of the paper, it said housing dropped to a two year low, and might not recover until 2015. Home loans by large banks have been part of the Irish financial plague.

Portugal has approved a bailout package for itself and most EU nations say that they will support it. New political powers in Finland could block the deal which leaves it hanging by a thread.

The powers within the EU and IMF could make one of two decisions now. The first would be a gradual rolling restructuring of the debt of the three nations. This could cause contagion which some experts believe might take Spain under if its borrowing costs rise. The second option is much, much more radical. It is to reset the terms of the loans to all three countries. Such a move would be complex and might meet resistance from “Europe’s bank” – Germany. A restructuring of the sovereign obligations of all three might well stop the bleeding in the nations as their GDP falls and deficits grow. It would prove to capital investment investors, especially those short debt in the countries, that the EU’s resolve cannot be broken.

Douglas A. McIntyre