Greek markets show all at risk should mistake trigger a default

In Athens, the unspeakable is at risk of becoming the inevitable.

Market metrics show Greece is in danger of sinking under the burden of its debt, putting repayments of about 500 billion euros ($546 billion) owed to European taxpayers, rescue funds, banks and bondholders in jeopardy.

Prime Minister Alexis Tsipras is locked in talks with creditors over measures attached to Greece’s bailout loans and a government official said on Friday the country won’t service its debt if creditors don’t release the funds. The government has also floated a restructuring that would link some future payments to economic growth, reduce interest rates and allow more time for repayments. While their intention is to exclude private bondholders, the danger is that talks collapse and Greece leaves the euro, leaving all parties facing losses.

“The biggest fear now is that Greece exits by mistake,” said Padhraic Garvey, global head of rates strategy at ING Groep NV in London. “The only feasible solution in the absolute extreme would be to turn all the official debt into a perpetual bond so it never gets repaid.”

With the country running out of cash, credit-default swaps indicate a 72 percent chance of Greece reneging on its debt within five years compared with 67 percent at the start of the month, according to CMA.

Inverted Curve

Three-year note yields are almost 10 percentage points higher than 10-year rates. Typically investors get more to lend for a longer period to compensate for inflation. With Greece, the immediate worry is whether they get their cash back. The price of five-year securities has tumbled to 68 percent of face value, from almost 100 percent after they were sold a year ago.

Greece sold the current three-year notes in July 2014, its second tap of capital markets within three months, after a five-year debt offering in April that year had been hailed by German Chancellor Angela Merkel as a step toward normalcy.

Sales of those securities, which totaled about 6 billion euros, increased the amount of Greek bonds outstanding to 67.5 billion euros, of which the European Central Bank and national central banks own about 40 percent, according to data compiled by Bloomberg. The market was reduced when Greece enacted the biggest-ever debt restructuring in 2012, which saw private bondholders write off about 100 billion euros.

The 10-year yield went as high as 44.21 percent in March 2012 as the country moved to restructure its debt.

German Credit

Euro-region governments and the crisis-fighting fund they set up in 2010 are owed almost 195 billion euros. Germany, the chief proponent of budget cuts and reforms in return for aid, stands to incur the biggest costs in any restructuring because it’s the largest contributor to Greece’s bailouts.

In all, public debt was 315.5 billion euros at the end of the third quarter last year, rising to about half a trillion euros when bank and company debt is taken into account.

Suggestions made by Greece’s Syriza-led government as to how a debt reorganization may work include issuing securities indexed to nominal economic growth to replace European rescue loans, effectively giving creditors a share in the country’s future performance. That way, should growth slow, repayments diminish, helping reduce the debt burden and default risk.

Greek Finance Minister Yanis Varoufakis also proposed exchanging ECB-owned debt for perpetual bonds, removing the burden of heftier repayments as the securities come due. The ECB has always resisted a voluntary haircut on its debt because that may be considered monetary financing, which is banned under European Union law.

No Default

Prime Minister Tsipras has so far pledged to repay in full obligations to the International Monetary Fund and the ECB, as well as private bondholders. The pledge has given confidence to investors such as Greylock Capital Management LLC, which have stuck with the securities.

Japonica Partners & Co., another backer of Greek debt, says the longer-term debt picture is more positive for Greece. For debts including loans from the European Financial Stability Facility, repayments on the principal aren’t due for several years, giving the nation some breathing space.

That may be of limited comfort in the face of more immediate discussions. Tsipras’s government needs to spell out economic measures it plans to undertake to free up aid payments that will keep the country afloat.

And political goodwill for Greece is waning. A poll by public broadcaster ZDF this month found that a majority of Germans no longer wanted Greece to remain in the common currency. In a Focus magazine interview, Bundesbank President Jens Weidmann raised the possibility of “a disorderly insolvency” that happens when “a member country of a currency union decides not to meet its obligations and stops payment to creditors.”

Deposits of Greek households and businesses fell 5 percent in February to their lowest level since March 2005, according to Bank of Greece data released on March 26. Greeks pulled about 23.8 billion euros, or 15 percent of the total deposit base, in the past three months.

“A debt restructuring has been under discussion as long as Syriza has been in charge and every time this issue has been raised there’s been a great many people opposing it,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “The debt that Greece owes is already at extremely favorable conditions.”


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