Rising doubts about Greece's ability to meet its fiscal targets and return to the markets for funding next year have convinced some senior officials in euro zone governments that a debt restructuring is inevitable.
Public debate on a restructuring has been almost taboo since Athens accepted a 110 billion euro bailout from the European Union and International Monetary Fund nearly a year ago, and opposition to the idea remains high across the zone.
The Greek government has repeatedly ruled it out and the European Central Bank also opposes it. German Chancellor Angela Merkel has stated in public that private creditors will not be forced to take any losses on euro zone debt before a new bailout mechanism for the bloc is up and running in mid-2013 -- and even then, only debt issued after that date would be affected.
But privately, some senior government officials in the zone are acknowledging for the first time what private economists have been saying for months -- that some form of restructuring may have to happen sooner, probably in 2012.
One of these European officials told Reuters on condition of anonymity that there was no credible alternative to this course of action.
He conceded however that it could take time for the Greek government to acknowledge the need for a restructuring. Only then could serious discussions start at the European level.
On Wednesday, the president of Greece's parliament said during a visit to Berlin that a debt restructuring was "entirely out of the question", and a spokesman for the European Commission said he was not aware of any talks on the subject.
Official sources in Brussels also said there had been no movement on a Greek restructuring, with one suggesting that Berlin remained staunchly opposed to the idea because of concern about the impact on the German banking sector.
Short of targets
Still, the fact that government officials are now talking about the inevitability of a Greek restructuring in private suggests a more open debate about it is likely to emerge over the course of 2011 as the financial difficulties faced by Athens become clearer.
Aid under Greece's three-year rescue package is due to flow until June 2013, but to emerge safely from its bailout, the government will have to demonstrate before then that it can tap the capital markets for long-term funding.
Athens has said it would like to resume selling longer-maturity paper later this year, or in 2012 at the latest. With its 10-year bond yields currently hovering near record highs at 12.8 percent and five-year yields over 16 percent, that looks increasingly difficult.
Add to that rising scepticism about Greece's ability to meet the fiscal goals set out for it by the EU and the IMF.
A slumping Greek economy -- gross domestic product is expected to contract by 3 percent this year after a 4.5 percent drop in 2010 -- and slow progress in tackling tax evasion have led to revenue shortfalls at a time when Athens should be reaping the low-hanging fruit from its reform drive.
Greek newspaper Kathimerini reported last week that the country's budget deficit for 2010 could be revised up to 10.6 percent of GDP, more than a full percentage point above target.
Gikas Hardouvelis, an economist with EFG Eurobank and an economics professor at Piraeus University, predicted that Greece's dire situation could lead to some form of restructuring later this year.
"My view has been that the most innocuous restructuring would be to extend the maturities of Greek bonds that are held by the private sector," he said.
Such a move seems more likely than outright "haircuts" on bonds -- cuts in the principal that Greece has to repay. It would probably be more effective in reducing Greece's debt burden than the voluntary debt buybacks suggested by some officials.
Some Greek lawmakers have begun to talk openly about a debt restructuring and such talk could build if officials from the EU, IMF and ECB who are visiting Athens this week demand new austerity steps from the government, as they are expected to do.
German banks
Euro zone officials have shied away from discussing a Greek restructuring publicly for fear of panicking the markets. But a year and a half has passed since the Greek debt crisis erupted, giving banks plenty of time to prepare for such an eventuality. And data on the exposure of German banks to Greek debt suggests a mild restructuring might not be a disaster for them.
According to figures obtained by Reuters, most of Germany's state-owned landesbanks have exposures in the low hundreds of millions of euros. Meanwhile Deutsche Bank and DZ Bank had exposures of over a billion euros at end-2010, with Commerzbank topping the list at nearly 3 billion euros. These are big numbers but far from crippling.
"The exposure of German banks to the PIIGS countries has been substantially reduced since the start of the crisis," said Frank Hagenstein, head of pension fund management at Deka Investment.
"This is especially the case for their exposures to Greece, Ireland and Portugal. Even if it came to haircuts, the impact on the normal banking operations would be tolerable, even if provisions would have to be increased."
If that is the case, German opposition to a restructuring that falls short of outright haircuts may not prove as strong as some officials in Brussels have suggested.
source: REUTERS
