Saturday, May 07, 2011

Diverging Views on Greek Debts

Economist: A Question of Maturity; Latin Lessons
FT: Jump in Greek Yields Spurs Restructure Talk
WSJ: Greek Debt Talks Widen Divisions in the Euro Zone

In May 2005, the euro-zone governments and the International Monetary Fund (IMF) provided a bailout program of €110 billion ($162.9 billion) for Greece, hoping that Greece will be able to reduce its budget deficit and repay its public debts in full. Recently, however, yields on the Greek bonds, which are inversely related to bond prices, sharply rose to over 20 percent, reflecting investors’ fear that restructuring Greek debts is inevitable. Also, Greece’s budget deficit remained still high (10.5 percent) in 2010. While the German government is now open to a restructuring of Greek debts, other European policymakers including the European Commission and France still firmly oppose any type of restructuring, arguing that it will lead to the belief that Ireland and Portugal will follow the same path.

What German officials suggest is a voluntary debt restructuring by extending the maturity dates without a “haircut,” a debt reduction. In that case, Greece will have more time to repay its debts and avoid borrowing more loans from the euro-zone governments and the IMF. However, there is a concern that the extension of the maturity dates alone will not fundamentally solve the Greece’s insolvency problem. The German approach does not aim to restore Greece's solvency, but it is politically motivated to reduce the taxpayers’ burden to provide additional loans to Greece. If no measures of a debt restructuring or a haircut are introduced, taxpayers in euro-zone countries will have to pay about €142 billion by the end of 2013, according to David Mackie, an economist at J.P. Morgan. However, if the maturity dates of Greek bonds that come due in 2012 and 2013 are extended, taxpayers’ burden can be reduced to 77 billion.

Countries in Latin America offer examples of how to solve sovereign debt problems in Greece. In 2003, Uruguay negotiated its debts with its creditors and extended the maturity dates by five years without reducing the size of its debts. Such option was successful in that Uruguay was able to avoid default on its debts and minimize losses on creditors. However, the problem Greece faces is worse. Greece holds debts (145 percent of GDP at the end of 2010) twice the size of the Uruguay’s and its economic growth prospect is not as strong as Uruguay’s. According to the Economist, Greece will ultimately need to reduce its debts as Mexico did during the debt crisis in the 1980s. In the case of Mexico, a debt restructuring was the first measure taken in 1982, which only provided additional time without solving the problem. In 1989, another measure to reduce the size of the debts eventually had to be introduced.

Economists also believe that reducing the size of Greece debts is ultimately inevitable and any further delay will likely contribute to a worsening of the problem. However, whether policymakers in Europe will achieve political consensus remains to be seen.

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