Restructuring of Greek debt now on the cards, says German official
Published 20/04/2011 | 05:00
THE Greek government was forced to pay a record 4pc to borrow for just 13 weeks yesterday as a senior German official said a restructuring of Greece's debt was now inevitable.
The Athens government sold €1.625bn of sovereign debt that is due to be repaid in just 13 weeks yesterday at a yield, or cost of borrowing, of 4.1pc.
The ruinously high borrowing cost comes as speculation grows that the country will be forced to "restructure" its debt.
"Restructuring" means not repaying the full amount owed or asking lenders to allow the country to repay debt over a longer period than had previously been agreed.
Greek officials have denied that the country is preparing a restructuring, but their efforts were dealt a major blow by a German official yesterday.
Clemens Fuest, chairman of the German finance ministry's technical-advisory committee, said he believed Greece would default.
"One must recognise the realities, I am expecting a haircut," he told Reuters. Mr Fuest said half of all Greek tax revenue was now being used simply to make interest payments.
Borrowing costs rose for all of the weaker eurozone economies yesterday but Greece and Portugal were the worst affected.
The yield in two-year Greek government bonds hit a record 20pc for a second day, while two-year Portuguese bonds hit 9.88pc.
Portugal's cost of borrowing has now overtaken Ireland's for the first time since the debt crisis started a year ago. The yield on Irish two-year bonds was 9.34pc yesterday.
The European Union and IMF have agreed to provide €58bn to Greece in bailout loans this year, giving confidence to investors who are lending money over the short term.
However, there is no commitment to provide the €25bn that Greece must raise next year and this has convinced investors that the country will be forced to seek a second aid package.
The cost of insuring Greek government debt against a default is now 12.5pc per year, or €1.25m to insure €10m of bonds.
"The market view is that a Greek restructuring will happen, the question is what form it takes," said Gavan Nolan, a credit analyst at research company Markit. "Once Greece goes, then all the contagion fears come back."
Portugal is now seen as the next most vulnerable euro economy, with Ireland close behind, but a Greek default would be a major shock.
German and French banks are owed €103bn by either the Greek government or Greek banks.
If Greece defaults, experts expect banks in the country to fail as a result.
"There has never been a national default that didn't bring banks down with it," a banker told the Irish Independent.