Greek Debt Restructuring One Step Closer

EU finance ministers open for a rescheduling of Greece's debt payments

(18.05.2011) EU finance ministers open for a rescheduling of Greece's debt payments

By Kyrre Aamdal, Senior Economist at DNB Markets

As a part of last year's rescue package Greece should from next year gradually increase funding from private markets. So far this has been impossible, and yields for second-hand traded government debt securities have been far too high for the government. A Greek debt restructuring has thus become more likely, as indicated by debt yields and CDS prices.

EU leaders have previously refrained from mentioning a possible Greek restructuring for fear it would further unsettle markets and worsen the euro debt crisis. Monday EU's finance ministers met in Brussels and after the meeting European leaders admitted that a rescheduling of Greece's debt payments is a possibility.

The most likely form of adjustment would be an extension of maturities on Greece’s debts – something that Jean-Claude Juncker, Luxembourg’s prime minister and president of the eurozone finance ministers, referred to as a “soft restructuring” according to Financial Times. In return for such a measure, Mr Rehn and others insist that Greece must first revive a stalled privatisation campaign that was supposed to net the government as much as EUR 50bn. They have also demanded progress on tax collection and spending that Mr Juncker acknowledged would be “unpleasant”.

At the meeting the EU ministers also agreed upon a rescue package for Portugal. Last week there were uncertainty about a Finnish obstruction of such a package, but on Friday the Finnish elected representatives gave a green light for a deal. The package totalled EUR 78 bn., two thirds funded by EU and one third funded by IMF. Portugal will have to pay interest rates between 5.5% and 6.0% for seven years loans. That is well below yields in the second hand markets, but above the rates Greece pays (4.2%) for corresponding loans.

Monday U.S. government debt reach the debt ceiling set by the Congress. The Treasury has previously said it had measures to handle the situation until August 2nd. After this deadline, America would stop paying its creditors – bond investors, contractors and government employees. Republicans and Democrats negotiate about raising the debt ceiling. The consensus in Washington – and among US debt investors who continue to keep Treasury yields extraordinarily low – is that ultimately the sides will find a compromise. Paul Ryan, the Republican chairman of the budget committee in the House of Representatives, said he guessed that a deal to avert default would probably only happen at the “last minute”.

Since Monday morning the EUR has strengthened 0.8% versus the USD. The euro trades roughly at 1.42-1.43 EURUSD this morning. The NOK has weakened versus the EUR, but Norwegian markets have been closed due to Constitution Day yesterday.

U.S. stocks have fallen three days in a row, partly on weak economic data and partly on company news. This morning Asian stocks have improved. Long-term Treasury yields have declined since Monday.

US industrial production level was unchanged from March to April, versus expectations for a 0.4% growth. Manufacturing production fell 0.4% due to a sharp decline in the auto industries. Delivery of auto parts from Japan may have been curbing the auto productions in April. In April housing start declined again and the May survey from NY Fed showed lowered industrial sentiment.

In UK the inflation reached new heights, but is still below the 5% peak forecasted by Bank of England.

Today the Fed will release the minutes from the April meeting. Even though Fed governor Bernanke held a press conference after the meeting, the minutes may reveal interesting aspects of the internal discussions and disagreements between the FOMC members.

Also today the Bank of England releases minutes from the May meeting. Her we might get more information of the Bank's assessments regarding the economic picture and the possibility for a rate hike.