Analysis: Restructuring talk gains momentum in Greece

By Dina Kyriakidou

ATHENS (Reuters) – A year since Greece obtained a 110 billion euro ($158 billion) international bailout, politicians and members of the public, fed up with austerity, are pushing their government to restructure its debt.

The government is still strongly resisting the idea but a deep recession and rising unemployment, coupled with slow visible progress in reforming state finances, are prompting even members of the ruling socialist PASOK party to urge the leadership to reconsider.

Many proponents stop short of recommending a “haircut” — a cut in the principal that must be repaid — on Greek government bonds. But options such as extending the maturities of bonds or lowering their coupon payments, once taboo, are now being publicly mentioned.

“It’s better to have a restructuring now, not necessarily haircuts but perhaps a repayment extension, since the situation is going nowhere,” PASOK stalwart Vasso Papandreou, head of parliament’s economic affairs committee, said last week. “We keep taking measures as if we are in a vicious cycle.”

Even with emergency loans from the bailout, markets have long doubted that Greece can dig itself out of its economic hole without some from of restructuring. Spreads between 10-year Greek government bonds and German bunds remain near 10 percentage points, and rating agencies keep downgrading Greece deeper into junk territory.

Prime Minister George Papandreou is adamant a restructuring — the first by a Western European state in about six decades — would be catastrophic for banks and pension funds holding Greek debt, make it impossible for Athens to return to markets soon, and leave Greece dependent on donors for the long term.

But disappointing revenues due to persistent tax evasion and a deep recession threaten to prevent Greece from hitting budget deficit targets agreed with the European Union and the International Monetary Fund in exchange for its bailout, despite considerable progress in the right direction.

So the public debate in Greece appears to be turning slowly to what type of restructuring would be most benign.

Even former European Central Bank vice president Lucas Papademos, an adviser to the prime minister, indicated on Friday that while a haircut was impossible, an extension of maturities on Greek debt could not be ruled out.

“Politicians are expected to rule out restructuring their debt until they do it. As we see with bailouts, governments say they don’t need it until they ask for one,” said Capital Economics analyst Ben May.


Greece’s 300 billion euro debt pile is projected to reach 158 percent of gross domestic product in 2012 before starting to shrink after 2014.

Drastic public wage and pension cuts, as well as tax hikes, have cut the budget deficit by 6 percentage points but not as much as targeted. Greece aims to raise 50 billion euros through privatizations by 2015 but this target may be too optimistic, and liberalization of markets has yet to boost the competitiveness of the Greek economy much.

“The government’s performance has been lacking, the numbers are clear,” said Theodore Couloumbis of the ELIAMEP think tank. “We have a socialist party that is forced to apply conservative policies, fighting its own gut instincts, its own ideas.”

With last year’s budget deficit expected to be revised to over 10 percent of GDP from the government’s last estimate of 9.4 percent, even harsher measures may be needed.

The prime minister is expected this week to reveal a medium- term fiscal plan which may include steps such as a tax on fizzy drinks and more cuts to social benefits. But the government, which won 2009 elections on tax-and-spend pledges, will find it difficult to get even its own members of parliament on board.

“We can’t keep saying we won’t take any new measures and then keep taking them because we can’t fight tax evasion, for example,” said PASOK deputy Sofia Yannaka.

The prospect of more belt-tightening is angering a public that has seen no top politician punished during decades of corruption, and no gain from the pain of belt-tightening.

After a year of austerity, people are not feeling any improvement in their daily lives — television regularly shows huge queues for medicine — while the authorities are failing to enforce even simple laws such as a smoking ban in restaurants.

“People can’t stand any more austerity measures. They lead us nowhere and there are fewer and fewer jobs. Let’s have a restructuring, why not? It won’t make our lives worse,” said Savvas Diamantides, 40, a civil engineer.

A public opinion poll last week showed 55 percent of those asked believed Greece would resort to some sort of debt restructuring or default. Although street protests against austerity have waned, more Greeks are joining the “I won’t pay” movement, refusing to pay tolls or buy public transport tickets.

Analysts say the government is slow to make laws and apply them partly because of resistance from the old guard within PASOK and allied labor unions, and partly because the mechanism of administration is flawed and operates only weakly.

“What they have done so far is not enough and it is not convincing,” said ALCO pollster Costas Panagopoulos. “It’s reality that has enforced the restructuring debate. The risk is that the public may start to demand it as a panacea.”


The shift in public opinion within Greece is mirrored to some extent by a shift in the international mood; some senior officials in euro zone governments now privately believe a Greek debt restructuring is inevitable, although they do not say so publicly for fear of panicking markets.

Dependent on foreign aid, Greece would almost certainly make any debt restructuring “voluntary” by seeking the agreement of a majority of creditors, and it would probably require a consensus among donor governments before it took action.

Such a consensus could take many months to achieve, so any restructuring might not happen this year. But bailout aid is due to stop flowing in mid-2013; before then, Greece wants to return to financing itself in the markets. When it does that, it will want to have put any restructuring behind it.

The Greek electoral timetable may also have an impact. the next elections are due by October 2013 and PASOK’s lead in public opinion polls has been dropping, to 2.9 percentage points in a poll published this month from 4.9 percentage points last December.

Meanwhile, the passage of time may make a restructuring more palatable to all sides by giving the commercial banks holding Greek debt a grace period during which they can make provisions for possible losses and cut their holdings gradually.

According to figures obtained by Reuters, most of Germany’s state-owned landesbanks, for example, now have exposures to Greek debt in the low hundreds of millions of euros. Deutsche Bank (DBKGn.DE: Quote, Profile, Research) and DZ Bank (FDGBGg.F: Quote, Profile, Research) had exposures of over a billion euros at end-2010, with Commerzbank (CBKG.DE: Quote, Profile, Research) at nearly 3 billion euros. These are big numbers but far from crippling.

Analysis: Restructuring talk gains momentum in Greece