Friday, April 15, 2011

Fears grow over Greek debt default despite bail-out

Fears that Greece will default on its debts soared on Thursday as the German finance minister admitted that a restructuring may be needed, despite last year's €110bn (£97bn) bail-out.

Investors' flight from Greek government debt left 10-year bond yields at a new euro lifetime high of over 13pc and yields on two-year bonds at over 18pc, after Wolfgang Schaeuble said "additional steps" could be necessary if the European Central Bank concludes that the country's burden is unsustainable.

Greece is implementing spending cuts but concerns have mounted in recent days because tax revenues have disappointed as the austerity programme squeezes the economy.

Although it can tap the rescue package backed by Europe and the International Monetary Fund as the Mediterranean nation's debts come up for refinancing, traders reckon Greece will be unable to escape its vast borrowings. Market caution means it now costs €1.1m to insure €10m Greek debt for five years.

Although Greece is not expected to default officially on the principal amount, holders of its debt may agree to reduce the interest rate and lengthen the terms of the loans. The effect would be largely similar to a default, as the value of the debt would fall.

Any restructuring before 2013 would have to be on a voluntary basis, as new rules that would force private creditors to shoulder some of the burden do not come into effect until then. (read more)