Euro Zone in Crisis Greece Says Debt Haircut Would Be 'a Huge Mistake'

Many financial analysts believe that Greece, despite over 100 billion euros in euro-zone aid, will ultimately have to restructure its debts. But Greece warned on Tuesday that such a move would be disastrous. The European Commission too has said a haircut is not in the cards.
Greek Finance Minister George Papaconstantinou announcing plans on Monday to go after tax dodgers.

Greek Finance Minister George Papaconstantinou announcing plans on Monday to go after tax dodgers.

Foto: Petros Giannakouris/ AP

By now, it has almost become consensus among financial analysts. At some point, an increasing number say, Greece will have to reorganize its debt. Otherwise, they say, the country's economy will be pinned beneath its €340 billion mountain of debt for years to come. A haircut, it would seem, is the only way out.

On Tuesday, though, Greek Finance Minister George Papaconstantinou told the state television broadcaster that a restructuring of his country's debt, which represents 150 percent of gross domestic product, would be disastrous for his country. "A restructuring, a bond haircut, would be a huge mistake for the country," he said. "It would carry a big cost and no benefit, and it would keep us out of the markets for 10-15 years."

His comments echoed those of European Monetary and Economic Affairs Commissioner Olli Rehn on Monday. Rehn said that debt restructuring "is not part of our strategy and will not be." He said that such a move would be a big risk to European financial stability -- alluding to warnings from other EU officials that a Greek bankruptcy could trigger the kind of turbulence set off by the Lehman Brothers bankruptcy in 2008.

Klaus Regling, head of the European Financial Stability Facility (EFSF), the temporary, €750-billion euro-zone backstop, went even further on Monday, accusing those predicting a debt restructuring of greed. "In the 1980s and 90s, banks received very high fees for the restructuring of sovereign debt in Latin America and Asia," Regling told the financial daily Handelsblatt. "They would love to do it again in Europe."

Little Progress on Debt Burden

Greece was the first euro-zone country to require help from fellow members of the European common currency union, receiving €110 billion last year. Despite the aid, however, the country has made little progress on reducing its debt burden and, with its economy still in recession, some feel that the country needs to do whatever it can to cut the amount it owes. The term on the bailout loans have already been extended from three to seven years and the interest rate due cut by one percentage point. Nevertheless, yields on Greek bonds remain exorbitant -- almost 16 percent on 10-year bonds, well above the German benchmark of 3.25 percent.

On Monday, Greece asked for even better conditions on the euro-zone loan. Speaking to the French paper Liberation, Papaconstantinou said, referring to a meeting with EU officials, "I expressed hope that we could have an even better arrangement regarding the repayment of the €110 billion." He said Athens is hoping for an additional extension of the repayment timetable and a lowering of the interest rate.

Athens also announced a new effort to raise €11.8 billion by 2013 through a new crackdown on tax evasion. In addition to negotiating with Switzerland regarding the monitoring of Greek deposits there, Athens envisions drastically increasing anti-fraud and anti-tax evasion measures. A former terrorism prosecutor, Yiannis Diotis, has been appointed to head the effort, and Papaconstantinou also indicated a speedboat division of fraud inspectors would also be established.

"Tax evasion is a crime against the country," he told reporters at a Monday press conference. "This is the first time ever that such a systematic effort has been undertaken." It has been estimated that the country's shadow economy is worth up to one-third of its GDP, the Associated Press reported on Monday.

Troubles in Lisbon

Concern is also rising when it comes to the establishment of a bailout package for Portugal. Lisbon requested assistance last month in the face of rapidly rising borrowing costs and the collapse of its government. But euro-zone aid, expected to be €80 billion, will be contingent on the country passing stringent austerity measures -- a package that will be challenging for the current caretaker government to push through.

Particularly in the short time available. The euro zone is hoping to agree on the package by mid-May to allow time to raise the money on international financial markets ahead a large chunk of Portuguese debt coming due on June 15.

"There are certainly reasons to be nervous," Regling told Handelsblatt. "Even a fully functioning government with a solid parliamentary majority at its back would have problems passing such a drastic package of reforms."

Looming over the discussions is the threat that Finland could reject euro-zone aid to Portugal. The country is the only one in the euro zone in which the parliament must grant its approval before the government gives a green light to such bailouts, to which all euro-zone countries must agree. Recent elections in the country, which saw the euro-skeptical True Finns party rake in 19 percent of the vote, mean that such approval is far from assured.

Slovakia, too, is indicating its discomfort with euro-zone bailouts. Richard Sulik, head of the neo-liberal Freedom and Solidarity party, which is part of the country's governing coalition, has said his party is opposed to the planned permanent euro-rescue fund. The fund, known as the European Stability Mechanism, would take effect once the EFSF expires in 2013.

"That is our last word," Sulik said recently of his party's rejection of the bailout fund.

cgh -- with wire reports
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