Posted on: 13/May/2011
by (Reuters) 13 May 2011
Reuters polls on Thursday showed that among 28 mainly sell-side economists and 15 fund managers, only three said a restructuring could be avoided.
There was also a consensus that any move would come later rather than sooner, with 80 percent of respondents not seeing restructuring until October this year at the earliest and nearly half saying it would be more than a year from now.
But consensus broke down when it came to the degree of restructuring required and the amount of pain for Greek bondholders it would entail.
Nearly 60 percent of the fund managers expecting a restructuring said it would eventually mean a "haircut" in which bondholders do not get all their money back. The median expectation was for a 55 percent cut in principal.
Among the economists -- who for the most part do not have to make buy or sell decisions about such things -- nearly half expected an eventual haircut, but a smaller 40 percent cut.
By contrast, the cost of insuring Greek sovereign debt against default -- credit default swaps -- is pricing in a 69 percent chance of that happening, with holders only getting back 42.5 percent of their principal investment.
But the message from both groups was firm and essentially the same -- Greece's current situation is untenable and will require action ranging from extending bond maturities to lowering promised interest rates to actually cutting principal.
"Restructuring for Greece is inevitable," said Robert Talbut, chief investment officer of Royal London Asset Management. "The question only surrounds timing."
With a debt pile of some 327 billion euros, Greece is currently in talks with European Union and International Monetary Fund officials over whether it has met the conditions for receiving a fifth tranche of aid from a 110 billion euro bailout sealed a year ago.
Improved loan terms and possibly more aid are also being discussed, underlining the difficulties Athens has in raising funds and meeting its obligations.
Later, not sooner
Although Greek officials and others deny that a restructuring will be needed, for financial market participants the debate focuses on when it will happen and what form it will take.
One argument is that Greece should restructure its debt right away, if only to get it over with.
"It would be better to do it now, because it would allow Greece to address the more urgent issue of how to revive its economy and bring down its elevated unit labour costs," said Lothar Mentel, chief investment officer at Octopus Investments.
Only eight of the 40 respondents expecting a restructuring thought it would take place before October, despite the sometimes feverish speculation that occasionally hits markets.
The contrary argument is that Greece needs time for its austerity plans to start to work before it can return to market in better budgetary shape.
But an equal pressure comes from Greece being in the euro zone and, as such, it is not entirely free to take decisions on its own that might have implications for its currency partners.
Mentel, for example, said that it would be better for the EU to delay so that it can prepare its banking system for eventual losses or repayment changes.
Restructuring would come as late as possible "given the inability of the EU to move on any important subject until the deadline is absolutely unavoidable," he added.
Putting it off for later
The political overlay of the issue also drives the question of how and when Greece will restructure.
Nearly 84 percent of respondents to the two polls were clear that extending the maturity of Greek bonds was the minimum that would happen -- either alone or as part of a broader range of changes.
Some 58 percent said restructuring would involve cutting the interest rates on already issued Greek debt. And although 44 percent of the entire sample expected a haircut, a number of respondents were sceptical that it would go that far.
"We think Europe will provide fresh money ... and extend maturities," said Miguel Jimenez, economist at Spanish bank BBVA. "The haircut is too risky for Europe as a whole."
The outliers in the poll were the three respondents who said Greece would not need to restructure at all -- a view that rests primarily on a belief that the EU will do what is necessary to avoid it.
"There is strong political will from all parties involved to avoid a restructuring," said Stefan Hofrichter, economic and strategy group director at Allianz Global Investors' RCM, adding that a restructuring would bring its own problems for Athens.
"Greece may manage to raise up to 50 billion euros by 2015 via privatisations. The necessary primary surplus would then be of feasible size," he said.
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