Op-Ed: Why the debate on restructuring Greek debt should begin now

Op-Ed: Why the debate on restructuring Greek debt should begin now

 

By Dionysios Chionis

The course of Greece’s debt and the country’s capacity to service it are linked to the crisis of the Greek and European economies. Despite undergoing two restructures, Greece’s debt still isn’t serviceable from the state budget and a third restructure is now necessary. The main reason behind this failure is the absolute absence of adequate preparation of each restructure. In the Eurozone, and Greece in particular, the issue of debt restructuring is one of many economic taboos. The word “restructure” was forbidden in both procedures until the day before each restructure. In fact, a former Finance & Economy Minister had threatened with recourse to justice in order to stop the discussion of a restructure.  The results of these practices are well known, and need not be discussed. However, we must point out that this time around it might be useful to use take a different approach since the previous tactic didn’t lead to a viable result. This means we must prepare Greece’s suggestions over the form of a possible restructuring. In any case this should not be seen by are European partners and creditors as unilateral action as it is a proposal of dialogue and there are reasons for it.

Currently, the international bond market is at a major turning point. It continues to understate risks that it previously had demanded greater damages for. One must consider that high-risk corporate bond yields in 2008 stood at 23 pct. Today they are at 5.6 pct shile those of emerging nations have fallen from 6 pct in 2008 to 2.6 pct today. Given the market cycles we expect this “good” time to come to an end and markets to adopt a different outlook and expectations. Then it will be extremely difficult for one to discuss – and be granted – the restructuring of a EUR 230 billion debt. The positive juncture is reinforced by the fact that the FED continues its bond buying scheme and quantitative easing which, as Ben Bernanke stated in a press conference on May 22nd 2012, will be limited early 2014. Then is perhaps the time markets will change their stance on state debts.

Apart from the favorable juncture internationally, there are also some reasons imposed by the domestic economic developments. The Greek economy is at a critical point where uncertainty and systemic risk is at a high and this overshadows any decision for investment, making development impossible. If the Greek economy maintains 5 pct recession levels in 2013, it will enter 2014 on a negative foot, resulting in the conditions for the success of the 2012 program being negated. As a result, concern over the course of the Greek economy will escalate; causing spreads and CDS’s to soar. In this event, we will once again be dragged by market developments to make another failed attempt at restructuring.

* Dionysios Chionis is a Professor of Economics in Democritus University of Thrace, Department of Economics.