A Greek debt restructuring is «neither necessary nor desirable,» the head of the central bank said on Monday, as he called for faster structural reforms to keep up with the country’s obligations.
Mounting speculation that Greece will default on its debt weighed on the euro, sent the country’s borrowing costs sharply higher and dragged Greek stocks prices lower.
“Such an option (to restructure) is neither necessary nor desirable,» Bank of Greece Governor Giorgos Provopoulos said in his annual report on the Greek economy.
“It is not necessary because we can meet our goals if we apply policies correctly. It is not desirable because it would have disastrous consequences on the access of the government and of businesses to international credit markets,» he said.
The central banker, a member of the board of the European Central Bank, said that the recession-hit Greek economy was «on the edge» as structural reforms were still «slow» in coming in relation to the country’s rapidly growing debt, which has exploded to around 340 billion euros.
Under increasing pressure from markets speculating that a restructuring is on the cards, Athens has repeatedly denied that it plans to cut a deal with its international lenders.
EU and IMF officials have also issued denials, but earlier today the euro was 0.6 percent lower at $1.4324, before bouncing above the $1.50 mark, while the yield spreads of Greek government bonds over German bunds continued to hover around record highs.
Greek two-year note yields were 85 basis points higher at 19.36 percent. Ten-year bond yields rose 25 basis points to a euro-era high of 14.08 percent.
The yield difference, or spread, between Greek 10-year bonds and German securities of a similar maturity widened to 1,061 basis points, the most since at least 1998.
Credit-default swaps insuring Greece?s bonds jumped 56 basis points to 1,211, signalling a 64.5 percent chance of a default within five years.
In late session trading, the Athens bourse?s benchmark general index was 1.2 percent lower at around 1,450 points.
Several German government sources in Chancellor Angela Merkel’s government told Reuters that they do not expect Greece to make it through the summer without restructuring its debt.
Meanwhile, news that a euroskeptic party made big gains in Finland’s elections on Sunday has stoked fears that the EU’s plan to deal with the debt crisis may not run as smoothly as hoped.
The pro-EU conservative National Coalition Party may have topped Sunday’s vote, but the coalition it previously belonged to no longer has a parliamentary majority. As a result, the party is expected to begin difficult negotiations on forming a new government with at least one euroskeptic party. The concern of the markets is that the Finns could derail the rescue plan for Portugal.
Regarding the broader economy, Provopoulos projected on Monday that Greece?s gross domestic product (GDP) will contract by 3 percent or slightly more this year as the country’s 230-billion-euro economy stays in recession for a third straight year.
The economic downturn is expected to drive unemployment above 15 percent, while credit expansion to the private sector will stay negative this year.
Provopoulos said that lower unit labor costs would help competitiveness, with the country’s current account deficit shrinking below 9 percent of GDP, helped by a recovery in exports and lower imports.
Consumer inflation is projected to slow from last year and average out at 3.25 percent, he added.