Restructuring: By design or by default?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Just as Europe was talking about bailouts a year ago, it is now moving into 'restructuring' territory. But a year from now not even that will have been enough and the new order of the day will be the dreaded D-word: default, writes Jens Bastian, visiting fellow for the political economy of Southeast Europe at St. Antony’s College in Oxford, England in an exclusive op-ed for EURACTIV. 

This op-ed was sent exclusively to EURACTIV by Jens Bastian, visiting fellow for the political economy of Southeast Europe at St Antony’s College in Oxford, England.

"We are possibly entering end game territory in the coming months. The news from bond markets about Greece resembles bulletins about Alpine peaks, not sovereign debt priced within reasonable parameters.

Greek three-year bond yields jumped to over 22% this week. Such surreal yield levels are pricing in the restructuring option to take place in the second half of 2011 after having sorted out the Portuguese bailout.

Credit default swaps (CDS) are price indicators highlighting the probability of a default. This financial instrument – not necessarily the most reliable vector – but nonetheless indicative of pricing mechanisms assumes that the possibility of Greece defaulting in the next five years has increased from 55% a month ago to 67% in mid-April.

Such yield levels are also a reflection of bond markets explicitly challenging the Greek government and its announcement [that it will] try and return to international capital markets next year for sovereign debt financing. In the view of bond traders and speculators, this intention is either science fiction or fiscal suicide. In both cases it is self-defeating for Greece.

Bear in mind that the yield on Greece's 10-year sovereign bond is 14.8% today, almost 600 basis points higher than a year ago when Prime Minister [Georgios] Papandreou asked on the remote island of Castelorizo for international financial assistance for Greece.

Once the Lisbon challenge is out of the way, and it is by no means guaranteed that this will be done in a timely manner, the mid-June evaluation of Greece by the Troika will most likely arrive at a rather sombre assessment of the current economic and fiscal situation in Athens. And the outlook for 2012 does not look promising either.

Finally, apart from the IMF, which is the notable exception in this cacophony of voices, all other parties involved in the current restructuring debate (European Commission in Brussels, European Central Bank in Frankfurt, eurozone finance ministers across the continent, [German] Chancellor [Angela] Merkel in Berlin and government representatives in Athens) are conducting fiscal and economic policymaking through megaphones. That is a recipe for failure!

Consequently, fears are increasing across the European investor community that the euro zone’s financial sector will sooner rather than later have to suffer the collateral damage of such a cacophony. The danger here is that sovereign debt restructuring in one (Greece) or a combination of countries (including Ireland and/or Portugal) is moving fast forward from an unlikely event to an unavoidable one.

The complexity of the subject matter and the political delicacy involved requires that policymakers and decision-takers talk behind closed doors. Instead, across European capitals we are witness to a tragedy in the making. What should be achieved by design risks becoming the default option.

My hunch is that just as we debated 'bailout' a year ago, we are now moving into 'restructuring' territory. If you take any article from the past year about Greece and substitute the word ‘bailout’ with ‘restructuring’ you can arrive at a revealing sense of déjà vu when reading the updated piece. But a year from now not even that will have been enough. Then the new order of the day will be the haunted D-word, i.e. default."

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