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Warnings that Greece May Have to Restructure Again

Despite two bailouts totaling $325 billion, a $134 billion write-down in debt, crushing pay cuts, tax hikes, slashed pensions, the coming firing of 150,000 workers, reducing the minimum wage 22-32 percent, phasing out collective bargaining rights for workers and the onset of deep pay cuts in the private sector as well, Greece may still have to restructure its debt again with the help of European governments, Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, said at an event at the London School of Economics on March 29.
“There may be ‘down the road,’ I’m not predicting today when, another restructuring of the outstanding debt,” he said. “At that time maybe the official creditors need to come into the boat.” Greece imposed losses of 74 percent over 30 years on private investors, effectively shutting itself out of the markets for some time, and will have to rely either on reinvigorating its stagnant economy or getting more bailouts from its public creditors.
Speaking at the same event, Poul Thomsen, the International Monetary Fund mission chief to Greece, said while Greece has made an “aggressive” fiscal adjustment, it will take at least a decade to fully complete the country’s reforms. He said that while Greece’s fiscal adjustment has been “unprecedented, very impressive, and undoubtedly socially very painful,” a “major adjustment is still needed, of 6-7 percent of Gross Domestic Product (GDP)”. Kraemer said that the priority some creditors have been claiming, such as the European Central Bank, is complicating the ability of Greece to lower its borrowing costs and be able to return to bond markets.
Caretaker Prime Minister Lucas Papademos won parliamentary approval on March 21 for a second bailout of $173 billion, but that is dependent on the passage of more tough measures, and there are signs already that his shaky hybrid government of PASOK Socialists and their bitter rival New Democracy Conservatives are trying to undermine the reforms they supported in a bid to position themselves for elections on May 6 as the two major parties are rapidly losing ground to anti-bailout rivals.
Thomsen said that after the elections, there is “no doubt it will have to reduce its fiscal deficit.” He also said it’s not clear when Greece will be able to return to markets. “It remains uncertain, with this high level of debt and the risks the program faces because of possible resistance to reforms, when market access will return,” he said. “There’s no room for manoeuver or policy slippage.”
The debt write-down under a so-called Private Sector Involvement (PSI) led ratings agencies to declare Greece in a technical default even though investors reluctantly were forced to accept the losses voluntarily or risk losing everything. “More and more official creditors have been jumping the queue and becoming so called preferred creditors, which means in the case of a restructuring they do not participate,” Kraemer said. For “the regular bond holders, the risk increases significantly. That means that the investor will demand a higher interest rate from Greece and that makes it harder for Greece and other countries on the periphery to establish a sustainable debt trajectory going forward.” He added that while making adjustments in a monetary union such as the Eurozone of countries using the euro is “more difficult,” it’s not an impossible task “if the political preconditions and flexibility are there.”
European officials said this week that Greece must step up efforts to tighten the budget and overhaul the economy to prevent the second bailout from collapsing. “Without a regime change in policy implementation and a much broader political consensus in favor of painful but necessary reforms, there is a high risk that the program derails,” ECB Executive Board member Joerg Asmussen said. “Political courage is needed more than ever.”
Asmussen’s comments were echoed by EU Economic and Monetary Affairs Commissioner Olli Rehn, who said that “challenges remain” as Greece seeks to cut its debt to around 116 percent of Gross Domestic Product in 2020 from more than 160 percent last year although economic officials and analysts said they doubt Greece will be anywhere near that target at that time.
(Source: Bloomberg)

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