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Greek Debt Restructuring: 3 Alternatives

May 12, 2011 6:15 AM ET
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Early this week the Euro Zone's sovereign debt crisis came back into vogue thanks to concerns about a Greek debt restructuring. So why does this particular skeleton keep on coming back to haunt the Euro Zone officials?

A few weeks ago I mentioned in my Greek restructuring article that markets bees were already buzzing with the possibility of Greece not being able to meet the original terms of its bailout package. You see, many economic gurus did their homework, and found out that even after a year of austerity measures, Greece's debt levels are still unsustainable.

Since Greece is the first among the PIIGS that got bailed out, I'm betting that EZ officials aren't sitting this one out! Here are three possible choices for the ECB to prevent a déjà vu of the euro-selling frenzy that we saw almost a year ago.

Option 1: Tap the EFSF coffers and sign the big fat check

That's what the EU's European Financial Stability Fund is for anyway, right?

Although giving the Greeks more money in their hands is probably the quickest way to soothe investors, the idea might not be good in the long term. For one, the move will not change the fundamental problems in the country. In fact, the strategy may even lessen the motivation of the Greek government to control its debt. After all, why should they implement more of their draconian austerity measures if they can always ask big daddy EU for more moolah?

Probably a more important concern with signing a bigger check for Greece is that taxpayers from other EZ nations may not agree with the decision. If the EU ends up lending more money, it would mean that taxpayers (I mean voters) are borrowing money in order to finance a risky Greek debt. Defo not a good idea if you ask politicians.

Option 2: Tweak the original bailout package and just cross our fingers

Another popular option that has been circulating around the FX hood is tweaking the original bailout agreement. For many, this either means more time for Greece to pay up, or lower interest rates on Greek bailout loans.

Much like the first option, tweaking the bailout package might also calm down investors as it also gives Greece more time to shape up. But before you say "Let's do this!," you have to be aware that extending the deadline for bailout loans won't have any effect until 2013 as there are no loans from the EFSF due in 2012.

How about lowering interest rates on its bailout loans?

Well, the move can definitely help, but only to a limited extent. Even if EZ economies agree to give Greece a free pass and drop interest rates to 0%, Greece would only save around 2.5 billion EUR.

Besides, even after tweaking the original agreement, the EZ officials still have to worry about Greece meeting the NEW agreement. Talk about long-term pains!

Option 3: Encourage debt exchange

Say whuut?

Basically, this would just be Greece asking bondholders to return their maturing bonds in exchange for new ones that will be paid much later. The government could save a lot of moolah by going with Option 3 as it is estimated that around 35 billion EUR worth of government is due to be paid in 2012. That is, of course, if investors agree to it.

A debt exchange would not only give Greece time to get its balance sheets in order, but it will also help reduce the risks for the creditors and the euro zone as a whole. Heck, who doesn't want that?

As much as I hate to say it though, the truth is that it's a band-aid solution. It doesn't address the country's mounting debt. Also, Greece will also hurt its reputation to creditors. It would be known as the country that sent a new I.O.U. letter instead of a check as payment for its debt.

What's the ECB's take on the issue? Well, head honcho Jean-Claude Trichet, as well as other ECB members, has done a good job of avoiding talks of a Greek restructuring by saying that it's not an option and the government should just focus on implementing its austerity measures.

But my question is, what if the budget cuts aren't enough? With markets already jittery for the possibility of a debt restructure, I think ECB hotshots need to put their thinking caps on and come up with a back-up plan, don't you?


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