Greece came under renewed pressure on Tuesday to explore a debt restructuring plan, with a German government adviser describing it as “inevitable” and involving “haircuts” with the need for forced losses on the principal that must be repaid to debt holders. Borrowing costs for Athens were seen to rise in a debt auction of 13-week treasury bills on Tuesday, with yields rising to 4.1 percent.
Greece has a debt burden that is forecast to rise to 340 billion euros this year, roughly one-and-half times its annual economic output.
“One must recognise the realities. I am expecting a haircut,” Clemens Fuest, Chairman of the German finance ministry’s technical advisory committee, reported to Reuters.
European Central Bank Executive Board members Juergen Stark and Lorenzo Bini-Smaghi both warned against such a step, however, saying it would hammer the Greek banking system and damage Europe’s credibility.
Despite their concerns, momentum seems to be building for some form of “voluntary” restructuring in which bond holders would agree to roll over their holdings next year or extend their maturities, possibly in combination with buying of Greek bonds at auction by the EU’s rescue fund.
If Athens and its partners can convince investors to come to an agreement for such a plan, it could help Greece cope with an expected funding shortfall next year.
According to the joint EU-IMF program it signed up to in 2010 as part of its 110 billion euro bailout, the government must raise 25 billion euros in long-term funding by 2012.
Without some help from its EU partners and private investors, the Greek government will probably have difficulty raising the necessary funds.
