Concern that the Greek debt crisis is far from resolved led Standard & Poor's to lower that troubled country's debt rating even deeper into junk territory yesterday (Monday).
The S&P cut Greece to B from BB- with a warning it could downgrade further.
"In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously-issued government bonds," S&P said in a statement.
A restructuring of the Greek debt could result in principal reductions of 50% or more, with the loss borne by the bondholders.
One year after a bailout intended to help the Greek government address its crushing debt – it owes more than 150% of its gross domestic product (GDP) – European Union (EU) leaders are worried Greece is not doing enough to fix its debt problems.
With its economy struggling, and promised tax reforms moving slowly, it has become apparent Greece will be unable to keep up with the payments on last year's $163 billion (110 billion euros) loan from the EU and International Monetary Fund (IMF).
In a sign of waning investor confidence, yields on Greece's two-year bonds have soared to more than 25% last week from less than 3% last year.
With bond yields that high, Greece can't borrow the $39 billion (27 billion euros) it will need to maintain its payments in 2012, much less the money it will need in 2013 and 2014.
"There are some very difficult questions that Greece has to address now," George Osborne, England's Chancellor of the Exchequer, told the BBC. "Because the whole assumption when the Eurozone put together a rescue package last year was that Greece would come back into the market and borrow. The market is quite skeptical about this happening."
Jitters over Greece were responsible for a 3.5% drop in the euro at the end of last week. Making matters worse was a Friday report in the German newspaper Der Spiegel that claimed Greece might exit the euro and return to its own currency.
Greek and other EU officials strongly denied consideration of such severe measures.
"It is simply impossible," Greek finance minister George Papaconstantinou told Italian daily La Stampa, pointing out that no mechanism exists to allow a country to leave the EU. Furthermore, he said that "the consequences could be catastrophic: the national deficit would double, banks would collapse and the country would enter a recession period comparable to the one of a country in war."
At a meeting of European finance ministers Friday in Luxembourg, EU leaders had a chance to voice their concerns directly to Papaconstantinou, who apparently asked his counterparts for an easing of the terms of last year's bailout loan.
"It would be better for us to extend once again the timing of repayment of the 110 billion euros that we're borrowing from our partners and that we further reduce the interest rate," Papaconstantinou told the French daily Liberation. "This would allow us to keep meeting our payments."
For the present, the EU seems to agree.
"We think that Greece does need a further adjustment program. This has to be discussed in detail," Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, said.
That could also mean more borrowing from the EU for 2012, which would lend Greece the money it needs at far lower interest rates than it must pay investors of its bonds.
Concern over the Greek debt situation is acute because it is only one of several EU countries in debt trouble – the others being Portugal, Ireland, Italy and Spain (PIIGS).
The PIIGS countries all face enormous debt loads made more difficult to repay by tepid economies.
"Quite clearly, the problem in the case of Greece, Ireland andPortugalis that investors have justified doubts about the ability of those countries to grow sufficiently quickly to service their debts," Simon Tilford, chief economist of the Center for European Reform in London, told Reuters.
In the near term, it appears the EU will try to help while avoiding the bad-tasting medicine of restructuring.
"For now, the most likely outcome is for policymakers to agree to provide Greece with additional funds and perhaps to extend the maturity of its existing bailout loans, effectively pushing back a Greek restructuring," Ben May, European economist at Capital Economics, wrote in a note to clients.
Ultimately, the severity of the Greek debt crisis will make restructuring unavoidable.
"We expect an eventual multi-year restructuring of both Greek and Portuguese bonds, and probably Ireland's bonds too," Carl Weinberg, chief economist at High Frequency Economics, told CNBC. "Restructuring can happen either the easy way or the hard way. The easy way is via a planned restructuring program. The hard way what Greece is doing right now."
News and Related Story Links:
- Money Morning:
European Debt Crisis: How to Profit No Matter What Happens
- The Financial Times:
Q&A: Pressure on Greece
- New York Times:
Greek Leader Irked by Speculation on Debt
- Bloomberg News:
Greece Says Improving EU Loans Preferable to Restructuring