Greek debt restructuring looks probable - Reuters poll

LONDON Wed Apr 20, 2011 4:54pm BST

A man walks in front of the parliament in Athens April 20, 2011. REUTERS/Yiorgos Karahalis

A man walks in front of the parliament in Athens April 20, 2011.

Credit: Reuters/Yiorgos Karahalis

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LONDON (Reuters) - Greece will have to restructure its debt in the next two years, say a strong majority of economists polled by Reuters -- despite firm denials from Athens and pleas not to do so from euro zone policymakers.

The poll, conducted this week, found 46 of 55 economists from across Europe saying Greece would have to restructure. The findings come almost a year after it took 110 billion euro bailout from the EU and International Monetary Fund.

Over half of the economists polled -- 24 out of 45 -- said it would be at least a year before Greece acted, while seven said six to 12 months. Ten said it would be within three and six months and just four opted for less than three months.

Thirty-eight economists said Greece would most likely seek to extend the maturity of its debt, while with 24 votes, lowering the interest rate on bonds was seen as the next most favourable restructuring option.

Nineteen picked imposing a haircut, or loss on the principal repayable to debt holders.

Respondents could pick more than one option.

"Debt restructuring via a haircut risks contagion to other European monetary union countries. I think that governments will avoid this," said Alexander Krueger at Bankhaus Lampe.

Of those who thought a haircut was likely, the poll gave a median 35 percent figure for the anticipated reduction to principal payments.

Concerns about Greek debt have plagued the euro zone in recent days in a crisis that shows no signs of abating.

Earlier this month, Portugal requested a bailout that could amount to 80 billion euros (70 billion pounds). Ireland, overwhelmed with debts from a ruined banking sector, sought its own 85 billion euro bailout last November.

Worries about Athens' ability to meet its fiscal targets and return to markets for funding have been fuelling speculation the country would seek to adjust the deal's terms.

"Current market conditions would be unbearable for Greece and prevent a return to the capital markets in 2012 as targeted by the Greek government," said Gernot Griebling at LBBW.

"That renders a restructuring unavoidable and so the market creates its own reality."

An auction of 13-week Greek treasury bills on Tuesday saw yields rise and foreign buyers fall while the yield spread of its 10-year sovereign bonds over German Bunds -- a measure of the risk attributed to holding Greek bonds -- widened to a record high of 1,162 basis points.

The cost of insuring Greek five-year government debt hit fresh record highs earlier on Wednesday of 1,275 basis points, meaning it cost 1.275 million euros to insure 10 million euros of debt -- more than Iceland's premium in 2008 as its financial system imploded.

Based on a recovery rate of 45 percent for investors, current credit default swap prices imply a roughly 70 percent chance Athens will not honour repayments on its debt in the next five years, according to Reuters calculations using Markit pricing.

IN DENIAL

The IMF, which said last week it did not see any need for a restructuring, predicts the Greek economy will contract 3 percent this year which, coupled with slow progress in tackling tax evasion, will lead to deeper budget shortfalls. Greece, home to around 11 million people, has a debt mountain that is expected to rise to 340 billion euros this year, roughly 1-1/2 times its annual economic output -- a ratio on a par with Zimbabwe's.

Greek, EU and IMF officials have repeatedly denied Athens would seek a restructuring, but markets are increasingly jittery.

A German government advisor said on Tuesday it was inevitable that Greece would need to restructure and said he was expecting a haircut.

However, European Central Bank Executive Board members Juergen Stark and Lorenzo Bini-Smaghi both warned against such a step, saying it would hammer the Greek banking system and damage Europe's credibility.

French Finance Minister Christine Lagarde also dismissed it in comments to parliament on Tuesday.

(Polling by Bangalore Polling Unit; Editing by John Stonestreet)

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