European policy makers say a Greek debt restructuring is not an option, but economists and some politicians are starting to suggest it may have to be part of the solution to Greece's debt crisis.
Greece's refinancing needs for the next three years total some 112 billion euros ($148.82 billion) in terms of redemptions and interest, and continued deficit financing would raise that to 138 billion, estimates Colin Ellis, European economist at Daiwa Securities.
With Greece frozen out of the debt markets, euro zone governments and the International Monetary Fund are discussing terms of a three-year bailout package of emergency loans which might total between 90 and 120 billion euros.
Those are big numbers to sell to taxpaying voters in contributing countries. And even if Greece gets all those loans, it may not recover quickly enough to return to the markets after three years—meaning it could need even more aid.
So a debt restructuring that would force private creditors to bear part of the pain may become inevitable. It could reduce the weight of debt on Greece's economy, or at least spread it out over a longer period of time, and help euro zone governments win domestic political support for the bailout.
"The market is looking at this (the bailout) and thinking that the only other option if you are not going to manage to do all this is default...or restructuring as it's sometimes euphemistically said," Ellis said.
Greek, European and IMF officials publicly refuse to entertain the idea, partly because they fear it might trigger a fresh investor panic. Shares in European banks, which have large holdings of Greek government bonds, could be dumped.
"I believe the current ad-hoc discussion (about banks taking a "haircut" on their Greek debt) is counter-productive," Axel Weber, president of Germany's central bank, told Bild newspaper in an interview published on Thursday. He said financial aid tied to tough conditions was the best solution.
For the short term, most investors believe the bailout will help Greece avoid a restructuring. A Reuters poll of 54 economists this week showed them estimating only a 10 percent chance of a restructuring in the next three months.
But they think the probability will rise in coming months and years, because of the risks that Greece may fail to hit the fiscal targets in the bailout, and that euro zone governments may lose the will to keep supporting it.
The poll found a 20 percent chance of a restructuring in the next 12 months and a 30 percent chance over the next five years. On Wednesday Greek credit default swaps, used to insure against Greece halting payments on its debt, were at one stage implying a 52.6 percent chance of a default within five years.
In Germany, which as the biggest European economy is key to the bailout, Chancellor Angela Merkel has not raised the idea, and has called instead for faster progress towards agreeing with Greece on terms of the bailout.
But some politicians in Germany's ruling coalition have suggested the idea. Norbert Barthle, budgetary spokesman of Merkel's Christian Democrats, said this week that banks holding Greek sovereign debt should be made to contribute to the rescue.
"That would mean whoever bought Greek bonds wouldn't get 100 percent of their value but say only 80, 90 or 70 percent—it depends," Barthle said. He argued that banks should pay partly because some had speculated against Greece in the markets.
Daniel Volk, a member of the lower house of parliament's finance committee from the Free Democrats, the junior partner in the coalition, said it might be worth trying to "convince" banks to extend repayment schedules on their Greek bonds.
Influential German business newspaper Handelsblatt said in an editorial on Thursday: "Greece's debt burden must be cut to make it sustainable. In some form or other this will mean that creditors will have to do without billions."
Rating agency Standard and Poor's, downgrading Greek debt to junk status this week, assigned a recovery rating of "4" to the debt, indicating it expected an "average" recovery of between 30 and 50 percent for holders in the event of a Greek restructuring or default.
The chief economist of Deutsche Bank, Germany's biggest bank, suggested this week that half of Greece's sovereign debt of some 300 billion euros might be written off.
Thomas Mayer said banks and insurers might take a haircut of 50 billion euros so that Greece could return to the debt markets.
Data from the Bank for International Settlements show bank exposure to Greek debtors, both public and private sector, totaled $236 billion at the end of 2009. French banks were exposed to 32 percent of that amount, Germany 19 percent and, beyond the euro zone, U.S. banks 7 percent and British banks 6 percent.
Credit Suisse estimates a 30 percent cut in the value of French banks' Greek government bond holdings, plus a 5 percent hit to their Greek loan books, would cost them 4.4 billion euros in after-tax earnings.
In 2007, French banks' net profits totaled 24.4 billion euros and in 2008, when earnings were hit by the global financial crisis, 3.0 billion euros, according to the French banking federation.
Other forms of restructuring might be less costly for private creditors.
Cinzia Alcidi, a research fellow at the Centre for European Policy Studies in Brussels, said a five-year moratorium on Greek debt repayments would be one solution that kept costs to investors as low as possible.
This would amount to a "soft default" which offered Greece the timeframe that major fiscal consolidations have required in the past in countries such as Sweden and Denmark, Alcidi said.
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