GREEK BORROWING costs surged to new records and its debt worries rumbled markets as a deeply contentious debate intensified on whether the euro zone’s first bailout recipient might have to restructure its debt.
Although the threat of any debt restructuring is routinely dismissed by EU authorities, German finance minister Wolfgang Schäuble obliquely acknowledged in a newspaper interview that such a manoeuvre may be necessary. This debate is crucial for Ireland, given anxiety in Government circles that the debt burden foreseen under the Irish EU-IMF plan is too great for the State to carry.
The standard position in Europe is that debt restructuring – a form of default – for countries in receipt of aid is not on the cards because their rescue programmes are designed to ensure their return to market financing.
Still, Mr Schäuble made it clear “additional steps” would be required if a looming assessment of Greece’s mounting debt found it to be unsustainable. Such remarks, from the epicentre of power in the battle against the sovereign debt crisis, reflect growing concern that the Greek rescue programme is not working.
However, senior European officials see something of a contradiction in Mr Schäuble’s stance. Germany quashed proposals only weeks ago to give the European Financial Stability Facility (EFSF) bailout fund the power to buy back sovereign bonds at a discount, a form of restructuring.
After EU finance ministers last week relaxed the terms of the Greek rescue for a third time, Mr Schäuble’s intervention suggests the debate in Berlin is turning. “In June we will get a progress report. I’m expecting a detailed analysis on the debt sustainability of Greece. That will be done in consultation with the [European] Commission and the ECB,” he told Germany’s Die Welt.
“If this report concludes that there are doubts about the debt sustainability of Greece, something must be done about it.”
Mr Schäuble had been asked whether Greece or other countries such as Portugal would ever eliminate their “mountains of debt”. He did not specify what new measures might be taken, but the possibility of restructuring was not denied.
Pressure on Greece was all the clearer yesterday as its finance minister George Papaconstantinou warned the country may not be able to return to financial markets next year. New data pointed to record unemployment, with more than one-third of people under the age of 24 out of work.
Markets responded badly. European stocks dropped, peripheral debt yields soared, the euro declined and the cost of insurance against default in weakened countries rose. The yield on Greek 10-year debt rose above 13 per cent, and the yield on its two-year notes reached 17 per cent. Irish 10-year bonds were well above 9 per cent, as were equivalent Portuguese yields.
In a sign of the divisions thrown up by the Greek dilemma, European Central Bank (ECB) executive board member Lorenzo Bini Smaghi warned any default could have catastrophic consequences.
Noted for his hard-line stance on Ireland’s obligations towards senior bank bondholders, he told Italian paper Il Sole 24 Ore Greek debt restructuring would threaten Greek democracy. “The Greek economy would be on its knees, with devastating effects on social cohesion and the maintenance of democracy in that country . . . But other countries must avoid pushing it towards a catastrophe.”
