Sunday Greek deputy Prime Minister Pangalos told a local paper that in theory debt restructuring should not be completely ruled out, though the deficit would need to be dealt with first. He argued against "demonizing" debt restructuring. This obviously has antagonized investors. The Greek 10-year yield rose 18 bp today after rising 120 bp last week. At 10.62% today, it is the highest yield since late September and this may underestimate the pressure as there is talk that European central banks may have stepped in last week.
The implication of Pangalos’ comments are clear. Greece will continue to make efforts to cut its deficit. This may be more complicated because of new preliminary findings having to do with how state-owned businesses have been accounted for, point to a larger deficit last year, mean more cuts would be needed this year.
The deficit cuts may earn Greece some good will and this will make restructuring its debt more palatable.
Still, the problem and the implication of the crisis resolution mechanism that the EU is trying to work out is how to deal with the large debt burden. It seems there are only three mathematical possibilities once it is agreed the debt is unsustainable. 1) exit, which under current treaties seems impossible to be imposed on a country; 2) bail out, which Germany has strongly indicated is a dead end; and three default/debt restructuring. Political considerations appear to be driving to the third option as the least distasteful.
Marc Chandler | Global Head of Currency Strategy