Greece Increasingly Likely to Restructure Debt

Despite tens of billions in European financial support, Greece still teeters on the brink of bankruptcy.

The parliament of Greece in Athens, July 25, 2007
The parliament of Greece in Athens, July 25, 2007 (Colm Costelloe)

It seems increasingly likely that Greece will have to restructure part of its debt obligations if it is to avert bankruptcy. It would be the first time for a eurozone nation to admit that it could not fully service its debt anymore.

Greece’s credit rating was substantially lowered last month which further drove up the country’s borrowing costs. Despite European pledges of solidarity and an insistence on the part of policymakers that a default is out of the question, the German government warned as early as October of last year that a restructuring was possible. Greek bond yields have climbed ever since.

The Greek state is more than €340 billion in debt. With a population of more than eleven million, nearly one of ten Greek workers is unemployed.

The country was forced to accept a €110 billion European bailout but necessary austerity measures have been unpopular. Heavy labor regulations and widespread corruption continue to impede job creation while the socialist government has been hesitant to upset the country’s powerful trade unions with additional reforms.

Although public expenditures increased to equal almost 47 percent of GDP last year, the government long hesitated to privatize state-owned enterprises.

In return for selling some €50 billion worth of state assets, Greece was allowed to borrow at a discount rate from the temporary rescue mechanism set up by its fellow eurozone member states in the wake of its fiscal crisis last year. The governments remains heavily involved in energy, health care and public transportation however while tax evasion is rampant.

Eurozone nations that came to Greece’s rescue promised their citizens that they wouldn’t lose any money in the effort; that the bailout was comprised merely of guarantees which Greece could realistically meet if it reined in spending. A partial default could cost European taxpayers dearly at a time of mounting Euroskepticism across the continent.

After Slovakia refused to help bail out Greece last August, the recent parliamentary victory of a nationalist party in Finland cast further doubt upon the willingness of other Europeans, who have themselves been subject to budget cuts, to aid a nation that is reluctant to reform. A majority of Dutchmen and Germans is also opposed to more financial support.

If Greece defaults, it could only invite more bailouts however — for Greece, presumably from the International Monetary Fund, because it would be cut off from financial markets but also for European, particularly German banks that have invested billions in Greek bonds.

Economists at the Brussels think tank Bruegel estimated that just 20 percent of Greece’s debt was held by domestic banks near the end of last year. About a third was held by pension funds and insurance companies from across Europe.