Greek Worries

Greek Debt Crisis Seen Getting Worse
Financial-Aid Needs Could Top $100 Billion, Bundesbank Chief Tells
German Lawmakers; Athens Readies T-Bill Offering

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FRANKFURT—Greece may require financial assistance of as much as €80
billion ($107.92 billion) to escape its debt crisis and avoid default,
Bundesbank President Axel Weber told a group of German lawmakers
Monday, according to a person familiar with the matter.

The estimate, considerably more than the €45 billion that European
countries and the International Monetary Fund are currently prepared
to extend Greece this year if it needs a bailout, suggests that a
rescue of the country may come in several stages and reach beyond
2010.

Mr. Weber, a member of the European Central Bank's governing council
and a leading candidate to succeed Jean-Claude Trichet as ECB
president next year, told the legislators that Greece's situation was
worsening and that "the numbers are changing all the time," according
to the person. A Bundesbank spokesman declined to comment.

A spokesman for the German government referred questions to the
finance ministry, which couldn't immediately be reached.

Mr. Weber's comments will likely fuel a debate in Germany and
elsewhere in Europe over the wisdom of extending heavily indebted
Greece a bailout without a fuller understanding of the country's
long-term capital needs. If Greece does receive a bailout, its access
to capital markets would likely be severely curtailed, leaving it
dependent on aid for the foreseeable future, economists say.

The Greek economy is under severe pressure due to austerity measures
aimed at curbing government spending to bring down the deficit.
Athens, which has said its total borrowing needs this year are in the
range of €50 billion to €55 billion, is expected need a similar amount
in 2011 and possibly more in 2012.

Greece's entire debt totals more than 110% of gross domestic product
and its budget deficit was about 13% of GDP last year.

Members of the 16-member euro zone agreed this month to extend Greece
as much as €30 billion in loans, should the country need a rescue. In
addition to the European aid, the IMF is expected to offer Greece as
much as an additional €15 billion.

Before Athens can receive any European funds, legislatures across
Europe, including in Germany, must approve the plan. Germany, Europe's
biggest economy, is expected to initially contribute more than €8
billion if Greece receives a bailout.

The German government is expected to introduce legislation within the
next two weeks that would allow it to send Greece aid if it requires
assistance, according to people familiar with the matter.

Mr. Weber told the gathering on Monday, which included lawmakers from
the center-right Free Democrats, that he saw "no alternative" to a
rescue of Greece at this point.

A European Union-International Monetary Fund delegation was scheduled
to arrive in Greece on Monday to discuss details of a possible rescue
plan. However, with the cloud of Icelandic volcanic ash blocking much
of Europe's airspace, that trip was pushed back to Wednesday, dragging
out the rescue-approval process for Greece still further and weighing
on the euro.

The difference in yields between Greek 10-year bonds and German
bunds—the benchmark in Europe—reached 4.62 percentage points.

These levels—the highest for more than a decade—reflect continuing
concerns about Greece's financing prospects.

Despite such concerns, Greece is expected to proceed with plans to
offer €1.5 billion in three-month paper on Tuesday, a week after
selling six- and 12-month Treasury bills.

Demand is likely to be concentrated among Greek banks, but foreign
buyers are expected to appear as well.

Jean François Robin, strategist at Natixis Bank in Paris, said he is
"reasonably optimistic" about the outcome of the auction because the
T-bill market can easily cope with the size and maturity.

"You can expect quite a good auction in terms of demand despite the
current difficult environment. I think the offered €1.5 billion will
be received without big problems," he said. "Having said that, the
global sentiment around Greece is very choppy, and some investors are
waiting for clarification on the European Union's help."

Many European officials have expressed concern that if Europe doesn't
act to save Greece from default, the country's problems risk spreading
to other European nations, endangering the euro.

Markets gear up for Greek debt restructuring

By Anousha Sakoui and Kerin Hope

Published: April 19 2010 19:09 | Last updated: April 19 2010 19:09

http://www.ft.com/cms/s/0/4c7c6d3e-4bdc-11df-a217-00144feab49a.html

In a world where the unthinkable has become thinkable, markets are now gearing up for an event many had not previously been factored into the realms of possibility.

Even as Greek bail-out discussions continue – talks between representatives of the European Commission, European Central Bank and IMF were delayed on Monday by the volcanic ash cloud – market watchers are starting to question whether, in the long term, Greece can avoid a restructuring of its debts or even an outright default.
“Investors and analysts are now running the numbers to see what a haircut to Greek bonds would be,” says Steven Major, global head of fixed income research at HSBC.

“One way to do this is to compare restructurings for emerging market sovereigns. Based on the defaults over the last 12 years the average long-term recovery rate is close to 70 per cent. Ultra-long Greek bonds currently trade at a price below this.”

Greek 10-year bond yields on Monday hit a new record high since the country joined the euro, with yields reaching 7.76 per cent and closing up 26 basis points.

Greece debtThe cost for investors to insure against a default on Greek bonds also hit a new high with five-year credit default swaps reaching 472bp, according to data providers CMA Datavision. It said current levels imply a probability of default of about 30 per cent over five years, higher than Iraq.

The IMF is expected to raise the question of debt restructuring at imminent meetings with the Greek finance ministry, according to one person with knowledge of the agenda. It is not likely to be a detailed discussion “just a pointed reminder of the debt forecast”, the person adds.

The IMF has already told the finance ministry informally that Greece’s debt will reach 150 per cent of GDP by 2014, according to this person. Greece’s debt to GDP level – 113 per cent in 2009 – is already the highest in the eurozone. The IMF calculates that Greece will need to find €120bn ($162bn) over the next three years.

In spite of these challenging numbers, finance ministry officials say default risk “is only a theoretical possibility”. The Greek government has not officially addressed the possibility of a restructuring, but it is expected that it might consider some form of liability management – ie, swapping short-dated bonds for longer-dated ones – later this year, according to one person familiar with the government’s thinking.

Debt restructuring covers a wide range of possible outcomes. At one extreme is a default event such as changing the terms of the bonds and imposing a haircut on creditors. However a softer option of liability management could ease refinancing pressure and avoid a default.

Some emerging market economies such as Lebanon and Mexico undertake liability management via regular bond exchanges, where investors tender their bonds for longer dated securities voluntarily. A similar model could be extended to Greece, some bankers have speculated, whereby investors could choose to tender a bond due in the short term in exchange for a longer term to pick up additional yield.

Voluntary is a key word, as some rating agencies would consider a debt exchange that was forced on bondholders as a default.

Carl Weinberg, chief economist at High Frequency Economics, proposes that Greece uses a multi-year restructuring of its bond obligations as a way to lower the debt service burden similar to Mexico’s debt restructuring in the early 1980s. Then Mexico’s lenders stretched all debt obligations maturing over the following 14 years over a 27- year term. The effect was to smooth a refinancing “hump” of principal repayments into a manageable long-term stream of princplal and interest payments.

Greece faces a similar hump over the next five years. Mr Weinstein calculates that total debt service including interest will peak near €50bn in 2014 and, assuming no economic growth between now and then, that would equate to borrowing more than 20 per cent of GDP. Total debt service over the next 5.5 years totals €240bn, roughly equal to its current GDP.

“Investor scepticism of Greece’s ability to service its debt has its roots in an amortisation and debt service schedule that bunches principal payments over the next five years, with a second ‘hump’ in maturities building for 2019,” says Mr Weinstein. “Greece has to be allowed to replace each of its existing bonds with a longer-term self-amortising note.”

He estimates that Greece would save €140bn in debt payments over the next 5.5 years, with no haircut on principal required, if it followed a Mexico-style restructuring over 25 years.

Some analysts could view a restructuring positively. “We are in unchartered waters. If Greece were to default in an orderly manner, with an agreed debt restructuring, then the impact might at least be contained to Greece,” says Gary Jenkins, analyst at Evolution Securities.

But few believe a restructuring announcement is likely soon. “I dont think it’s likely that a restructuring would happen this year,” says HSBC’s Mr Major. “The longer the uncertainty around Greece goes on the more unsustainable the funding position becomes and markets will push for a restructuring.

“But Greece cannot be allowed to default in any way because of the risk of contagion and damage to the single currency. Dubai was a good example of how even the suggestion of restructuring, at the time it was called a ‘standstill agrement’; can shut down funding channels and make things a lot worse.”