A German government adviser said on Tuesday that a
restructuring of Greek debt was inevitable, raising pressure on Athens to seek a solution to the debt woes that are shaking investor confidence in the euro zone.
restructuring of Greek debt was inevitable, raising pressure on Athens to seek a solution to the debt woes that are shaking investor confidence in the euro zone.
Greek borrowing costs rose and foreign demand shrank in the country's first debt auction since speculation of a debt restructuring flared last week following comments from Germany's finance minister.
After a weekend election in Finland in which an anti-euro party scored strong gains, the head of the party that is likely to lead the next government sent reassuring signals that the strength of the anti-euro True Finns would not derail a pending bailout for Portugal.
Financial markets settled after a tumultuous session to start the week, clouded by growing fears of a Greek restructuring. The euro pushed back up toward $1.43 after shedding nearly two cents on Monday in its worst one-day fall in over two months.
But the bonds of so-called peripheral euro zone countries like Greece, Portugal and Spain, all struggling with high debt and poor economies, remained under pressure, with yields hovering just below euro-era highs.
Clemens Fuest, who chairs the German finance ministry's technical advisory committee, said Greece's extremely weak balance sheet meant a restructuring was inevitable.
"One must recognize the realities -- I am expecting a haircut," Fuest told Reuters.
Outside of Berlin, officials continue to rule out a restructuring, with European Central Bank Executive Board member Juergen Stark warning in a Portuguese newspaper interview about the costs of such a move for Greek banks.
"It is a very firm denial from our side," a spokeswoman for the European Commission said after a Greek newspaper quoted a senior official from the EU executive as saying Athens had accepted a restructuring was unavoidable.
Voluntary solution?
Despite the repeated denials, European officials appear headed toward some form of "voluntary" restructuring in which bond holders would agree to roll over their holdings next year or extend their maturities, possibly in combination with buying of Greek bonds on the primary market by the EU's rescue fund.
If Athens and its partners can convince investors to agree to such a step, it could help Greece cope with an expected funding shortfall next year.
According to the EU/IMF programme it signed up to last year as part of its 110 billion euro bailout, the government must return to the markets in 2012 to raise 25 billion euros in long-term funding, a step which now looks impossible barring help from the EU, private investors or both.
An auction of 13-week treasury bills underscored the challenge for Athens, with the yield rising to 4.1 percent and foreign take-up falling back to 36 percent.
"In the last few days, talk about a debt restructuring has weighed on the yield and foreigners' appetite for Greek debt," said a bond trader who declined to be named. "Foreigners are worried and do not take part in the issues."
The voluntary solution could encounter political opposition in countries like Germany, and markets may see it as a mere stop-gap measure that keeps Greece on life-support in preparation for a more painful "haircut" on its debt from 2013.
Greek banks are the biggest holders of the country's sovereign debt, with German and French banks also heavily exposed.
The latest figures from the Bank for International Settlements put German bank exposure at $26.3 billion and that of French banks at $19.8 billion as of September 2010.
Add in their exposure to Greek banks and non-bank private entities -- groups that could be hammered by a sovereign debt writedown -- and the figures show German and French banks are owed a combined $103.3 billion.
But the president of the Association of German Public Sector Banks said a haircut -- a cut in the principal that must be repaid -- on Greek debt "would not be the end of the world."
German banks say they have successfully reduced their exposure to Greece over the past year, but doubts remain about the ability of the country's weakened regional Landesbanks to cope with a restructuring.
Finns reassure
In a positive sign for Portugal, which is in talks with EU and IMF officials on a bailout package that is expected to reach 80 billion euros, Finnish National Coalition party leader Jyrki Katainen ruled out major changes to the deal.
Public anger at the series of bailouts for Greece, Ireland and Portugal bubbled over in the Finnish election, boosting the results of the True Finns party, which has vowed to derail the Portuguese rescue.
Another Finnish party, the SDP, is also critical of the bailouts and its leader said it wanted banks and other investors to share the burden in an aid deal for Lisbon.
"We'll see what is possible, but anyway, the changes would not be very big," said Katainen, who is expected to become prime minister of the new government. "Finland must, for its own good, create a smart and responsible government programme which maximises our influence in all international forums."
The leader of Portugal's main opposition party, the Social Democrats (PSD), said the country desperately needed a bailout and vowed to work with the caretaker government to seal a deal before a funding crunch and election in June.
source: REUTERS
