Deutsche Bank has outlined the pros and cons of debt restructuring in its latest Global Economic Perspectives report and says although the European Union (EU), International Monetary Fund (IMF) and most government officials of EMU countries officially reject suggestions of a restructuring of the debt of Greece, Ireland or Portugal, an increasing number of them seem to be indicating in informal conversations or comments to the press on background that such a measure may eventually be unavoidable for at least one of these countries.
“We conclude that a debt restructuring in the context of a multi-lateral agreement among creditors, the debtor and EU institutions is probably unavoidable, at least for Greece,” says the bank’s report. “A number of politicians have insisted that in such a scenario, participation by the private sector would be essential – and in our view it would also be politically less costly than forcing EU tax payers to shoulder the entire burden. We agree with our colleagues that a restructuring is unlikely in the near term, but we see political forces at work that suggest a debt restructuring for Greece is likely before the second half of 2013.”
This new set of information has triggered an intense public debate of the issue and Deutsche Bank say it has recently issued detailed analyses of the case of Greece and concluded that a debt restructuring is unlikely in the near term but may well happen in the medium term.
“We restrict our discussion to these countries as an orderly debt restructuring for a larger country, for example Spain or Belgium, is in our view virtually impossible,” says the economists in the report. “Should a larger EMU country be cut off from market funding, financing by the EU taxpayer would seem unlikely and there would probably be no alternative to a monetary financing by the ECB, most likely with dire consequences for the survival of the euro in the longer term.”
“Fortunately, economic fundamentals are much stronger in the larger countries, and determined policies to address existing weaknesses have helped to restore market confidence in the solvency of these countries,” adds the report.
Economists at Deutsche Bank say that public sector involvement in a debt restructuring is needed to create transparency and prevent the failure of the entities most exposed to losses from bringing down the entire financial system of the euro area.
“More generally, public sector involvement could help rebuild trust between creditors and debtors when such trust has been impaired by a default,” says the report. “Specifically, the public sector could act as a guarantor for the terms of debt restructuring by offering investors the exchange of impaired bonds against EU institution government guaranteed bonds with a lower principal value, lower coupon payment or longer maturity (similar to the so-called Brady bonds). With this, the public sector would take over the risk of a renewed default by the debtor on the restructured debt.”
(LB)