Greek reeling under surge in debt costs
By Shrikesh Laxmidas |
April 15, 2011, Friday
|
Print Edition
Print Edition
GREECE faced a new surge in its debt costs yesterday after Germany said for the first time that Athens may need to restructure its debt, a move one central banker warned would be a "catastrophe."
Growing talk of restructuring by Greece, the first eurozone member to receive a bailout a year ago, points to a new stage in the debt crisis that has driven Ireland and Portugal to seek aid and forced draconian budget cuts in Spain.
German Finance Minister Wolfgang Schaeuble acknowledged officially for the first time on Wednesday that such a step may be necessary.
But it is also clear policymakers are divided on the idea and European Central Bank Executive Board member Lorenzo Bini Smaghi warned that a Greek debt restructuring would cripple its banks and economy. "Ultimately it's up to Greece to decide the way forward, given that it will suffer the worst consequences," Bini Smaghi told Italian business daily Il Sole 24 Ore. "But other countries must avoid pushing it towards a catastrophe."
The return investors demand to hold two-year Greek bonds spiked to 18.3 percent, up 0.83 percentage points and the highest since after it asked for a bailout last year.
The fact that those yields are now much higher than 10-year rates points to concern among investors that it is shorter-term bonds that will lose the most value in any restructuring.
The growing debate about the sustainability of Greece's debt load goes to the core of the troubles facing Europe's most-indebted economies as they struggle with budget cuts which undermines their ability to grow and service their debt.
Greece received a 110-billion-euro bailout nearly a year ago, followed by Ireland. Portugal asked for a bailout last week.
"The severe economic recession and the lack of improvement in tax revenues suggest Greece may already be in the vicious spiral of too tight fiscal policy and too weak economic performance, where a write-off of part of the debt would be the only possible way out," said Giada Giani, a Citibank economist.
Growing talk of restructuring by Greece, the first eurozone member to receive a bailout a year ago, points to a new stage in the debt crisis that has driven Ireland and Portugal to seek aid and forced draconian budget cuts in Spain.
German Finance Minister Wolfgang Schaeuble acknowledged officially for the first time on Wednesday that such a step may be necessary.
But it is also clear policymakers are divided on the idea and European Central Bank Executive Board member Lorenzo Bini Smaghi warned that a Greek debt restructuring would cripple its banks and economy. "Ultimately it's up to Greece to decide the way forward, given that it will suffer the worst consequences," Bini Smaghi told Italian business daily Il Sole 24 Ore. "But other countries must avoid pushing it towards a catastrophe."
The return investors demand to hold two-year Greek bonds spiked to 18.3 percent, up 0.83 percentage points and the highest since after it asked for a bailout last year.
The fact that those yields are now much higher than 10-year rates points to concern among investors that it is shorter-term bonds that will lose the most value in any restructuring.
The growing debate about the sustainability of Greece's debt load goes to the core of the troubles facing Europe's most-indebted economies as they struggle with budget cuts which undermines their ability to grow and service their debt.
Greece received a 110-billion-euro bailout nearly a year ago, followed by Ireland. Portugal asked for a bailout last week.
"The severe economic recession and the lack of improvement in tax revenues suggest Greece may already be in the vicious spiral of too tight fiscal policy and too weak economic performance, where a write-off of part of the debt would be the only possible way out," said Giada Giani, a Citibank economist.
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