Speculation grows on default

Speculation about whether Greece will default on its debt picked up in Germany on Wednesday, prompting Athens and Berlin to officially deny the possibility of debt restructuring.

Unnamed officials at Germany?s Finance Ministry told Reuters that they are working on contingency plans to handle the fallout in case Greece fails to get on top of its massive debt problem. One source close to the ministry said German civil servants were analyzing how a Greek restructuring might work, as well as what this would mean for German banks and the stability of the eurozone. No conclusions have yet been reached.

?They have started to consider the unthinkable,? said the source. ?They are looking at a contingency plan preparing for Greek restructuring. It is not something they want, but something they recognize,? he said.

Earlier, German newspaper Die Zeit, citing government sources, reported that Berlin is considering a plan to allow Greece to buy back its own debt using eurozone crisis funds. Some investors saw that report as a possible new step forward in Europe?s efforts to quell the debt crisis, and the idea of a shift of Greece?s debt out of private hands to European Union governments buoyed markets, reducing the relative cost of borrowing for Italy, Spain and Portugal. But Greece and Germany denied preparing for any restructuring of Greek debt.

Greek Deputy Finance Minister Filippos Sachinidis said the only discussion being held on Greek debt is the time frame of the repayment of the 110-billion-euro loan from the EU and the International Monetary Fund. A German Finance Ministry spokesman said in a statement that ?Germany is not preparing a restructuring of Greek debt.?

Publicly, Germany remains opposed to any restructuring or partial nonpayment of Greek debt, but some officials in Berlin are increasingly concerned that it may be inevitable.

Talk of a Greek default pushed the spread between the Greek 10-year bond and the German bund wider to 870 basis points yesterday before later narrowing to 844 bps.

Meanwhile, in an interview published in German newspaper Handelsblatt on Wednesday, Lars Feld, a designated economic adviser to the German government, said that Germany should set funds aside to prepare for a Greek default.