Financial Times: too early to restructure Greece's debt

Analysts at Financial Times doubt that the euro zone will be able to get out of the crisis without suffering much, as they have thought before. The economists changed their opinion as the tensions within the monetary union have significantly strengthened during the past week.

Let’s name the 2 main events here. Firstly, the elections in Finland showed that the 2 parties, which propose a partial Portuguese debt default as a condition for the bailout, have gained much weight among the nation’s population. This propelled the market’s concerns making the bond spreads widen to the record highs. Secondly, German Chancellor Angela Merkel may lose her majority over the domestic legislation of the European Stability Mechanism (ESM), the permanent mechanism to provide help for problem European states. The vote on the matter has already been put off until autumn. To make the domestic audience change attitude towards ESM, German officials talked about the inevitable Greek restructuring. This lead to the boom of rumors and ended with an investigation counter Citigroup conducted by Greek authorities.

The FT economists, however, warn that Greece’s premature default may have very dangerous consequences for the euro area. According to the newspaper, voluntary restructuring won’t save the country’s debt problems. Greece faces no short-term liquidity squeeze as it’s supported by the EU and the IMF, so there’s no urgent need for the restructuring. Moreover, the specialists believe that Greek banking sector won’t survive large and involuntary haircut. The ECB would face a haircut on its direct investments of Greek government bonds, and, more importantly, much of the collateral posted by Greek banks would vanish. Greek default will cost German taxpayers alone at least €40bn ($58bn), including recapitalization of the ECB estimates FT – that’s much more expensive than the bailout.

If Greece defaults, the EU and Portugal probably won’t be able to agree on a rescue package in time, the EU’s dispute with Ireland over corporate taxes may escalate, German, Finnish or Dutch parliaments may fail with the ratification of the ESM, and Greek parliament may refuse the new austerity measures and many other disasters may happen. FT analysts also think that there is the downgrade threat for French sovereign bonds. If it happens, the logic of the European financial EFSF will be destroyed as it is built on guarantees of the AAA countries.