Wednesday, May 11, 2011

Greece Restructing 'Only a Matter of Time'

Greece restructuring ‘only a matter of time’

David Rothnie
11 May 2011
Financial News
Analysts have warned that a restructuring of Greece’s debt is inevitable following a further ratings downgrade from S&P and Moody’s, warning that there is a "61% to 75%" chance of a Greek debt default over the next two to five years.

Gary Jenkins, head of fixed income research at Evolution told clients in a note on Tuesday that is “it only a matter of time before the EU bows to the inevitable and arranges some kind of debt restructuring.”

Meanwhile, fixed income strategists at Deutsche Bank put the likelihood of a Greek debt default at 61% to 75% over the next two to five years.

Greece’s problems returned to the top of investors’ minds on Monday after S&P cut the country’s credit rating by two notches to B, on the grounds that any voluntary debt restructuring would constitute a default.

S&P’s move, which came on the same day as Moody's placed its B1 rating on review for possible downgrade, followed admissions from European politicians that Greece’s €100bn rescue package is insufficient.

Jenkins said in the note that the country will need an additional €30bn in 2012 alone, making additional aid a formality unless the European Union grasps the nettle on restructuring – which would involve swapping the country’s bonds for lower coupon debt.

The alternative is a new debt deal and Dow Jones on Tuesday cited a senior Greek government official saying he expected a new aid package of nearly €60bn as early as next month, a move that would push the problem further into the future without solving it.

Jenkins said: “The extension of funds beyond the current package could be an opportunity to look at debt sustainability and the need for restructuring (although this should already be part of the review process under the current bailout terms.)”

Jenkins said that the introduction of the European Stability Mechanism in 2013 makes a a restructuring of Greek debt essential. The terms of the ESM require that a country’s solvency is determined before funds are committed. This means that Greece, which has a debt/GDP ratio of 142.8%, would have to run a primary budget surplus in order to show it is reducing its debt.

Jenkins added: “It would not be necessary to run a budget surplus if there is positive GDP growth in order to reduce the debt ratio, but if the interest rate on outstanding debt exceeds the nominal growth rate a primary surplus is required to avoid an ever-increasing debt/GDP ratio.”

Jenkins estimates that Greece would have to run a surplus of 7%, a level that has only been achieved by oil-exporting countries in the last 30 years.

On Monday, the European Central Bank became the latest institution to throw its weight behind a revamped assistance programme for Greece.

While the ECB, European Commission and some eurozone governments continue to oppose a debt restructuring, some German and Greek officials have floated the idea of a “voluntary restructuring” involving an extension of maturities, which triggered the action from S&P.

The country’s CDS had closed 15bp wider at 1365bp after the downgrade on Monday and Deutsche Bank’s fixed income team said that “assuming a 50% recovery rate, the CDS is currently implying a cumulative probability of default of 61% and 75% over the next two and five years, respectively. Our European economists think that a voluntary debt restructuring is becoming more popular amongst policymakers. Whichever way you look at it none of these options are appealing to the vanilla senior unsecured bond investors but its increasingly likely that some kind of managed event will eventually happen. The timing will be almost 100% politically influenced.”

Meanwhile Greece was readying a a €1.25bn of six-month paper on Tuesday as the heads of delegations from the ECB, IMF and European Commission arrived in Athens to complete an inspection so Greece can receive the fifth batch of bailout loans from its original €110bn rescue deal.

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