EU breaks taboo, talks of Greek debt restructuring

Europe's top financial officials broke a taboo on Tuesday and acknowledged for the first time that Greece may have to restructure its debts, a move which could stoke Europe's sovereign debt crisis. Speaking on the sidelines of an EU finance ministers' meeting, Jean-Claude Juncker, chairman of the 17-country Eurogroup, said there was a need to move towards what he called a "soft restructuring" of Greek debt.
-- Juncker says Greece must work on privatisation first
-- German deputy minister says only option if all else fails
Other officials suggested the term implies debtholders agreeing on a voluntary basis to accept later repayment. Juncker said Greece first needed to raise 50 billion euros ($70 billion) from privatisations and pay down its debts, which now total almost 150 percent of GDP. But in return some form of restructuring of Athens' debt might be considered, he said.
"If Greece makes all these efforts, then we must see if it is possible to make a soft restructuring of Greek debt. I am strictly opposed to a major restructuring," Juncker said. Olli Rehn, the European commissioner for economic and monetary affairs, seconded Juncker's position, saying there was a need to maintain private investors' exposure to Greece.
"In this context, a voluntary extension of loan maturities, a so-called re-profiling or rescheduling on a voluntary basis, could also be examined," he said. Greek officials quickly confirmed the possibility, with both the labour minister and the deputy foreign minister saying Athens was prepared to discuss a "soft restructuring".
"One possible solution can be to extend maturities on a voluntary basis with the participation of all players," Labour Minister Louka Katseli told Reuters. The euro fell against the dollar and the price of German Bund futures rose slightly after the comments. For weeks, senior European officials have dismissed the idea of a debt restructuring, concerned about setting a precedent and the knock-on impact on major banks and the European Central Bank, all of which are large holders of Greek debt.
But financial markets have been steadily discounting the likelihood and analysts are largely agreed that in Greece's case it is unavoidable given the size of the debts and the government's growing inability to finance them. Greece and Spain both sold short-term debt successfully on Tuesday, and the price of short-dated bonds among euro zone periphery countries fell, but the cost of insuring Greek debt against default rose.
Germany's deputy finance minister, Joerg Asmussen, said signing up private holders of Greek debt for "reprofiling" should only be an option if further reforms from Athens fail to solve the problem. But how to persuade creditors to voluntarily alter the terms remains a big open question. While Juncker's and Rehn's statements marked a significant shift in official comment on Greece's predicament, there was apparent disagreement among other senior officials about whether such a move was the right thing to do, although that may have reflected the confusing array of phrases used. "Restructuring, rescheduling - off the table," French Economy Minister Christine Lagarde said late on Monday, after Juncker had hinted at a "reprofiling" of Greek debt, a way of extending the maturities on its loans without going through a more fundamental restructuring process.
"A restructuring or a rescheduling, which would constitute a default situation, what we would call a credit event, are off the table for me," she said. European Central Bank governing council member Ewald Nowotny told Austrian radio that a "soft restructuring" was not on the cards, insisting that Greece needed to shore up its finances.
While all EU officials have rejected the idea of a full-on default, they have now introduced at least three terms to refer to the possibility of some alteration in the repayment schedule of Greek debt: restructuring, rescheduling and reprofiling. From the financial markets' point of view, there may be little difference among them. The manager of a debt fund in the United States joked that the only time he had heard the word "reprofiling" used was in reference to a nose job.
But sovereign debt analysts draw a distinction between restructuring, which involves enforced losses, and "reprofiling", when bondholders are asked to exchange short-term debt for longer-dated bonds with a similar coupon, thereby altering the profile of the yield curve and effectively giving the debtor more time to repay the loan. The repercussions would still be widespread. Around 70 percent of Greek government bonds - worth around 215 billion euros - are held abroad, mostly by French, German and American banks and by the European Central Bank.
A "reprofiling" would mean a delay in repayment, which may in turn cause knock-on credit problems. There is also the risk that if Greece's debt are revamped, Ireland and Portugal, both of which have also been bailed out by EU/IMF emergency schemes, may have to re-examine their debts. Ireland is already pushing for a lower interest rate on its loans from the EU/IMF, saying current terms just increase its burden.