German Government Advisers See Greece Defaulting

Two German government experts view a debt restructuring by Greece as unavoidable at this point, particularly after Athens failed to meet deficit targets. At the same time two of the overborrowed country’s ministers continued in newspaper interviews on Saturday to insist that a restructuring (read: default) is not in the cards.

[From Reuters]: “Greece and the European Union have ruled out the prospect of a debt restructuring. Such a development would be negative for the euro zone and the Greek economy,” Development Minister Michalis Chrysochoidis told ‘Ethnos’ newspaper.

And Deputy Finance Minister Philippos Sachinidis told ‘Eleftherotypia’ newspaper debt restructuring involving a haircut would send pension funds and banks into an abyss.

Growing concerns that Greece will restructure its massive debt  — anticipated to reach 340 billion euros this fiscal year, approximately one and a half times its output — has sent Greek bond spreads to record wide levels. Greek 2-year bonds, which move inversely to bond prices, yield more than 24%. That is more than 13x the yield of similar German bunds. The yield-spike accelerated after it was revealed that Greece’s budget deficit for fiscal 2010 was 10.5 percent, which was higher than the 9.4 percent of just a couple months ago.

According to Markit, which monitors pricing activity and changes in credit-default swaps [CDS] spreads, Greek CDS — considered the current “villain de jure” in the Greek debt mess — are now 1376 basis points, meaning it costs $1.376 million to insure $10 million of 5/yr Greek debt.

Clemens Fuest, a member of German Chancellor Angela Merkel’s council of economic advisers, told a Greek newspaper that the European Union leaders had started to prepare for the eventuality of a Greek default.

[From Reuters]:”They do not discuss a Greek debt restructuring openly because this would cause bigger uncertainty and speculation in the markets,” he was quoted as saying.

Meanwhile, Lars Feld, one of the five “wise men” who advise the German government on economic policy, told To Vima newspaper in an interview that according to him “restructuring is the only road to take, for Greece to feel some relief and for creditors to contribute to the solution of the Greek problem.”

His view echoed that of Fuest, who said that Greece will not be able to repay its huge debt without help from abroad.

“If there is no restructuring, uncertainty over the future of Greece’s economy will delay its growth,” Fuest said.

Greece, whose crisis is the result of uncontrolled government spending and debt issuance to fund the spending, is the European Union’s most indebted member.

The sooner Greece starts putting them islands or the Acropolis and the Parthenon up for sale to save economy, the better. Certainly, the idea gets Greeks up at arms, but even if Parthenon, Acropolis or some islands (Greece has around 6,000 islands off its coast, of which 227 are inhabited) are annexed, they would not have to be moved at all. They would just bear an insignificant sign that reads: “Property of the European Union”. Objectively speaking, the country who lied its way into the EU, has very little, if nothing, to offer as collateral for the money it needs. Most importantly, almost no one believes that the debt-ridden nation can reduce its massive deficit much through higher tax receipts and lower spending.