Greek ′haircut′ may be unavoidable, experts say | Business| Economy and finance news from a German perspective | DW | 02.02.2011
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Greek 'haircut' may be unavoidable, experts say

In the run-up to this week's EU summit, politicians are searching for a way out of the debt crisis – and there's plenty of talk about haircuts for Greek bondholders.

A row of empty hairdresser's chairs

Bondholders may be asked to accept cuts to help Greece

European Union officials are working intensively on a strategy that could help Greece shed some of its massive debt, currently totaling 300 billion euros.

No decision on stabilization is expected at the two-day summit starting on Thursday; that's been slated for the summit taking place at the end of March. But politicians are already airing possible solutions, and receiving expert opinions on them.

One solution involves a haircut, meaning that all Greek bondholders would take a loss on their holdings. The reason for this is the high interest rate that Greece has to pay for its state loans. Greece may have taken drastic steps to reduce its budget deficit, but its total debt will continue to climb – to over 160 percent of GDP by 2014, experts say.

"I think a haircut is inevitable for Greece," Birgit Figge, credit analyst at DZ bank, told Deutsche Welle.

Greek Finance Minister George Papaconstantinou

Greek Finance Minister George Papaconstantinou is overseeing spending cuts and tax increases

Like many experts, she believes cutting the debt is the only way to give Greece the breathing room it needs for its economy to grow.

"Of course, there's the chance that the European Financial Stability Fund will use money on the capital market to buy up Greek bonds. The bonds currently hold between 60 and 80 percent of their nominal value. That means, the moment an investor sells a bond, he'd be taking on a cut of between 20 and 40 percent," Figge explained.

Buy-back plans also on the table

More often, however, talk is of a plan to give Greece funds from the EFSF, the financial safety net put together by the eurozone, to buy back its own debt with the aid of a low-interest loan. The German business daily Handelsblatt has reported that Chancellor Angela Merkel's government is not opposed to such a move, as it would decrease Greece's overall debt.

Figge added that such a prospect would also be interesting for investors. "It would give market participants who feel they can no longer afford the risk of holding onto their bonds the chance to sell them," she said.

But she added that there are also risks associated with this strategy. The moment that market participants know that a big player – either the Greek state or the bailout fund – is buying bonds, their value would go up. It's exactly for this reason that Commerzbank Euorpe expert Christoph Weil is skeptical that a voluntary haircut will work.

Columns of Zeus Temple in Athens

The EU is looking to shore up Greece's financial foundations

"You could assume that market value would increase by 10 percent, and then further assume that not everyone will sell, because some investors will of course continue to expect a 100 percent return," Weil told Deutsche Welle.

The result would be a smaller percentage of actual debt relief, although Weil added that whether Greece's deficit is 150 percent or 142 percent is of little consequence. And what of a forced debt restructuring in lieu of a voluntary haircut? That could take the form of either an extended payback period, or a value decrease. But Commmerzbank Europe expert Weil says such a move is to be avoided, as it would have so many negative effects.

"You couldn't rule out a loss of trust, as was the case after the collapse of Lehman Brothers," he said. "It would be a global shock that would once again affect the whole world and probably put us all back in recession."

Instead, Weil proposes another solution.

"Give Greece unlimited credit via the EFSF. The loans would currently cost 6 percent, and the program that Greece has embarked on until 2013 could be extended indefinitely."

Merkel backing economic government pact

EU officials undeniably face a difficult task: how to reduce Greek debt without dampening the country's own efforts to reform its economy.

German Chancellor Angela Merkel

Chancellor Merkel is pushing for greater economic coordination at the EU level

This is why Chancellor Merkel is strongly advocating an EU economic government, or a "pact for competitiveness," as it's become known. The pact would see closer alignment of financial, economic, and social policies for members of the eurozone. DZ bank analyst Figge says politicians must quickly decide on a strategy.

"The politicians have their backs to the wall," she said. "They know that if they don't pave the way for a solution that is convincing to both investors and market participants, there is great danger that the crisis will spread to Portugal, Spain, Italy, and even Belgium. And the problem in terms of Spain and Italy is that they're too big to be rescued."

Author: Zhang Danhong / dc

Editor: Mark Hallam

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