The Irish Times reported on Friday EU finance ministers have opened tentative talks on the restructuring of Greek sovereign debt but analysts have pointed out that the European Financial Stability Facility (EFSF) will not be enough to take Greece through a successful debt restructuring.
According to the Irish Times, a euro zone source said EU ministers were considering if credit can be doled out from the EFSF so that Greece can buy back bonds from secondary markets.
Media reports in recent days have suggested that EU leaders are mindful of the dangers if Greece stumbled into a sovereign default and that they were working hard to avoid such a situation. There have even been reports of a softening of the German stance towards raising funds under the EFSF.
However, according to an economist at Capital Economics, even if the EU pushed ahead with Greek restructuring through EFSF, a few glitches still remain.
First, the outstanding volume of Greek government bonds is more than €300bn. Even if Greece paid an average of, say, 80 cents in the euro from market participants, it would still need to raise €240bn to buy its bonds back. ... That sort of money is not at the EFSF’s disposal, says John Higgins, economist at research firm Capital Economics.
Higgins points out that the amount is not much less than the total amount that the EFSF can lend on the basis of the €440bn of guarantees that have been pledged by eurozone member states.
Secondly, Greece could still be faced with an unsustainable debt burden even if it swapped its existing liabilities for new ones, he says. Admittedly, a €240bn loan from the EFSF would lead to a 20% reduction of Greece’s sovereign debt if the funds were used to redeem €300bn of existing bonds at face value. But if the rate at which Greece had to borrow from the EFSF were around 6% ... then Greece’s new cost of borrowing would still exceed the likely nominal growth rate of its economy in coming years by a large margin.
He says the question is whether EU leaders will agree to lend funds to Greece at a lower interest rate, in which case Greece can solve its troubles at one stroke. But he says there are problems with this plans too. If this happens, it will be tantamount to a fiscal transfer by the back door and will lead to the impairment of the EFSF credit rating.
So what are the chances Greece avoids sovereign default?
When push comes to shove, a default by Greece can probably be avoided. But only if she is lent money at a much more heavily subsidised rate, or preferably given it, Higgins says. Stronger countries may eventually decide that there is no alternative if Greece is to avoid default and the euro is not to be imperilled. But it is not clear yet that they do.