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Sovereign Debt : the Pain in Greece’s neck

That’s a huge pain in Greece’s a**… sorry… ‘neck’, I wanted to say: the fiscal situation and the huge debt. That Greece is not going to be able to cope with its debt, currently at over 340 billion euros, is something that even stray cats in Greece know; let alone the stray dogs… 

Consequently an alternative solution must be found. Bonds buy back? Debt restructure? Repayment extension? How about the interest rates?

The  Greek government but also the International Monetary Fund vehemently reject any debt restructure.

Greek Finance Minister, George Papaconstantinou does not miss a chance to repeat that Athens does not even think to proceed to a restructure and Central Bank governor, Yiorgos Provopoulos, stresses that “even the mere talk on the issue hurts the country”.

International media reports circulated over the weekend the plan on Greece buying back its bonds financing the action via EFSF capital-loan as proposed by the European Financial Stability Fund EFSF head Klaus Regling. German weekly Der Spiegel reported that Regling’s proposal was discussed during the Eurogroup meeting, last week and even that German financial ministry official called the plan a “good idea”. 

Greek state television NET claimed earlier that the plan foresaw a bonds’ hair cut at about 25% and the possibility of interest rates 2,5-3% for Greek loans from the EFSF.

Given the fact that the biggest volume of Greek state bonds are in the hands of  the European Central Bank and major European banks, would they accept such a big hair cut? I don’t think so… Should Chancellor Angela Merkel give the green light for such a plan without a package that would secure the German banks, some of her party-fellows will certainly bite her. I am not even sure that this solution would be economically sustainable for Greece then how many billions of euros would be able to get out of these deals?

So the only scenario currently on surviving path seems to be repayment extension. This, of course, would mean an increase of the loans interest rates, similar to those of Ireland. Without a general solution for the euro zone bankrupt members, repayment extension would be another born to die solution for Athens.

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