Think tank warns of costly delay

A leading European think tank predicted on Tuesday that Greece will lose its debt battle and be forced into restructuring it, while one of Eastern Europe?s largest insurers wrote down the value of Greek debt it owns.

Researchers from the influential Bruegel think tank said that Greece?s debt burden is so large that Athens will not be able to service it without a restructuring and the sooner that happens, the smaller the loss for investors would be.

?We think that Greek debt is unsustainable and should be restructured and it is better if it happens now than later,? said Bruegel?s Zsolt Darvas.

Bruegel research is often reflected in the decisions of eurozone policymakers.

Darvas said that assuming Greek debt should be reduced to 90 percent of gross domestic product, the haircut in the value of bonds held privately and by the ECB would be 40 percent this year. If policymakers wait until 2013, the haircut would have to grow to 60 percent, because the debt would grow, Darvas said.

The restructuring would be needed because simply to stabilize Greek debt at the current levels, Athens would have to have a primary budget surplus of 8.6 percent of GDP, rather than the 1.2 percent of GDP primary deficit forecast by the European Commission for 2011. To bring debt down, the primary surplus would have to be even higher, by some 5 percentage points. ?This is too much,? Darvas said.

The final version of the paper is to be published next week, ahead of a February 4 meeting of EU leaders, Darvas said. The Commission has said the summit should make decisions on increasing the size and scope of operations of the eurozone rescue fund, the European Financial Stability Facility (EFSF).

Meanwhile, Vienna Insurance Group, Eastern Europe?s largest insurer, has written around 25 percent off the face value of Greek government bonds in its investment portfolio.

?There are discussions about whether there will be haircuts – voluntary or involuntary,? Martin Simhandl, VIG?s chief financial officer, told Bloomberg in an interview on Tuesday.

?You should be prepared for something like that.?