SCENARIOS-Options for Greece if it cannot pay its debts

(repeats to additional subscribers)

By Emelia Sithole-Matarise

LONDON, April 27 (BestGrowthStock) – Financial markets have
increased bets Greece will have to restructure its debt or face
a default in the medium to longer term to tackle its fiscal
problems even if it clinches a planned three-year aid package.

The cost of insuring Greek debt against default has surged
to ever higher records and the cost of raising capital to pay
off old debts and run the country is at its highest since at
least early 1998 as investors have cast doubt on whether the
deal is enough to resolve Athens’s structural problems.

The package, under which Greece would receive some 45
billion euros from the European Union and International Monetary
Fund, is
seen sufficient only to stave off default for 12 to 36 months.

After that time, questions remain over how Greece will
tackle its fiscal problems because it is doubtful that any aid
package agreed this year would be extended beyond that.

Analysts and traders have outlined a range of options for
Greece, or any other euro zone country that might face a similar
position, if it is unable to make payments on its bonds.

NEGOTIATED DEBT RESTRUCTURING

PROBABILITY: most likely in the medium to long term

Greece would negotiate a restructuring of its debt before
missing a payment. This would require investors to take a
significant discount on their debt holdings and could include
extending maturities or possibly investors switching to longer
maturities.

Bondholders could, however, see haircuts of anything from 20
to 40 percent of the net asset value of their debt positions,
according to some analysts’ calculations.

According to Brown Brothers Harriman’s calculations, the
current two-year Greek/German bond yield spread is consistent
with about a 25 percent chance of a 50 percent haircut or about
a 33 percent chance of a 40 percent haircut.

The two-year Greek/German bond yield spread has ballooned to
more than 1,400 basis points as investors pummeled Greek debt.

MARKET IMPACT: Spreads on other highly-indebted countries in
the euro zone would widen sharply while German benchmarks would
benefit from flight to quality and the euro could fall to around
$1.15, levels last seen in 2005.

UNILATERAL DEBT RESTRUCTURING

PROBABILITY: highly unlikely

Greece could impose a debt restructuring on its creditors,
for example extending maturities or forcing investors to take
haircuts without prior agreement.

Historically, non-negotiated restructuring are more likely
to result in a haircut for creditors than are agreed
restructurings.

An even more unlikely outcome under this scenario is that
markets punish Greece so severely that, despite enormous legal
and logistical obstacles, Athens would elect to leave the euro
zone and European Union.

However, market consensus is that leaving the currency union
would make it even more costly for any fiscally weaker country
to borrow because of the addition of an exchange risk premium to
the sovereign risk premium.

MARKET IMPACT: The euro would be hit even harder as markets
would as a knee-jerk reaction price in a greater risk of euro
zone disintegration. Spreads of higher-yielding euro zone
countries would blow out even further versus German benchmarks.

OUTRIGHT DEFAULT

PROBABILITY: highly unlikely

About 70 percent of Greek debt is estimated to be held by
foreigners, most of them within the euro zone, notably German
and French financial institutions. European Union officials will
try to avoid an outright default.

An outright default by Greece or any country facing a
similar situation would mean exclusion from capital markets, as
happened with Argentina when it defaulted in 2001. The South
American country has not issued any euro or dollar-denominated
debt since then as it has yet to come to an agreement with
international creditors.

MARKET IMPACT: The euro would most likely fall below parity
against the dollar, intra euro zone bond yield spreads would
blow out, with the bond market for other countries facing fiscal
challenges drying up, leaving only triple-A rated countries able
to issue debt.

OTHER POSSIBILITIES

Other possibilities include the European Central Bank
providing loans to help Greece meet its obligations, buying
Greek bonds or relaxing its collateral rules yet further to
accept any bonds as collateral irrespective of their ratings.

However, such scenarios are seen as outliers as they would
require political or policy decisions that analysts say would be
very difficult to achieve.

Another complicating factor is that many investors have bet
on a default through credit default swaps and thus have a vested
interest in forcing such an outcome.

Stock Investing

(Reporting by Emelia Sithole-Matarise)

SCENARIOS-Options for Greece if it cannot pay its debts