Analysis - Emerging markets say fear not Greek restructuring

A sculpture showing the euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt, April 1, 2010.

NEW YORK (Reuters) - If emerging markets could teach a lesson to cash-strapped euro-zone nations, it would be that a debt default isn't always the end of the world.

At least for Greece, burdened by about 300 billion euros in debt it can hardly service, a restructuring could be a less painful alternative, as well as an inevitable political choice as stern austerity measures face growing popular opposition.

Athens is also unlikely to trigger the type of financial contagion that followed the collapse of Lehman Brothers because its debt, although reaching an amount equal to 130 percent of Greece's gross domestic product, is not that large compared with the euro zone as a whole.

"Greece is clearly insolvent," Adam Lerrick, a visiting scholar at the American Enterprise Institute, told a recent conference organized by the Emerging Markets Trade Association in New York. "And if you were to ask me to design a debt stock that is easy to restructure, that would be Greece's."

Lerrick is not someone to be ignored. He led Argentina's debt renegotiation team after the country's $100 billion (67,8 billion pound) debt default in 2002.

A restructuring would be the "the quickest path" to debt sustainability and economic growth in Greece, he said.

"Otherwise, the official sector's preferred route is going to be a long, painful process for Greece -- basically deflation and unemployment and deficits and hardship," he said.

That idea, although hardly consensual, has been growing among investors who fear a "debt trap" could throw Greece further into recession if the government blindly follows austerity measures imposed by the European Union and the International Monetary Fund.

"There is a very strong consensus in the market that Greece will have to restructure. That's based on the idea that Greece will be caught in a certain debt deflation trap and the economy won't be able to grow," David Riley, Fitch's head of sovereign ratings, told the Reuters Investment Summit this week.

"That judgement may well be right but I think it's a big call to be making at this point in time," Riley said. There is a chance the Greek economy can make the necessary budget adjustments and show "some level of growth" at the same time, he added.

Greece, with a debt load forecast to reach 149 percent of GDP by 2013, is expected to see its economy slump by 4 percent this year after a 2 percent drop in 2009, as tax increases and cuts in wages and pensions take a toll.

The government has insisted that Greece will not restructure its debt and will "gradually recover" after hitting the "deepest" point of its recession in 2010.

Financial markets are not the only ones to take those comments with a grain of salt.

"Greece's plan is insensitive to the Greek population and silly because it keeps the same problems in its roots -- it doesn't attack Greece's lack of competitiveness or its structural economic problems," Argentina's economy minister, Amado Boudou, said recently in New York.

Argentina is still trying to lure investors who did not accept its 2005 debt restructuring, in an attempt to return to international capital markets. After its 2002 default, however, the Argentine economy grew at a rate of about 9 percent for five years, after which the economy slowed.

The same recipe may not work for Greece, some analysts warn, because Argentina also devalued its currency, tremendously boosting the competitiveness of its exports. For Greece, leaving the euro zone would be a more difficult decision.

EASY TO RESTRUCTURE

A possible restructuring of the Greek debt, however, could prove to be far less catastrophic and easier to complete than many investors fear.

The main concern is that a disorderly debt restructuring could cause a Lehman-like financial contagion, since commercial banks in Europe hold a significant amount of Greece's debt.

Greek banks alone own about 30 percent of the government debt stock, said Lee Buchheit, a partner who specializes in sovereign debt management at Cleary Gottlieb Steen & Hamilton.

"A restructuring done in a disorderly way conceivably may put in jeopardy the solvency of those institutions ... many of which have come through a near-death experience in the past couple of years," Buchheit told the Emerging Markets Trade conference in New York.

Still, full-blown financial contagion seems unlikely given the overall size of the Greek government debt, said Fitch's Riley.

"We just don't think Greece is large enough, significant enough in terms of the euro zone as a whole. We don't share the view of some commentators that a Greek debt restructuring would lead to a systemic banking crisis," he said.

Also, Greek bonds are quickly shifting from the hands of the private sector to the European Central Bank, as a result of the ECB's policy to purchase bonds issued by financially weaker euro zone members to curb "market speculation."

Since the ECB began buying up mostly Greek, Portuguese and Spanish bonds on May 3, some 15 percent of Greece's bonds have already migrated from the private sector to the hands of the monetary authority, analysts estimate.

Other characteristics make Greek bonds easy to restructure. One is that 90 percent of the debt stock is under local legislation, which can more easily be changed by the government in order to facilitate the deal, said Buchheit.

In addition, retail investors own just a small portion of Greece's debt, which also have a very low volume of credit default swaps attached, making both the negotiation process and the post-default much less complex. (Editing by Leslie Adler)