For the first time since the depth of the European debt crisis first came to light, officials are now openly discussing the possibility of debt restructuring as part of the solution. Jean-Claude Juncker who presides over the Eurogroup consisting of finance ministers from the seventeen Eurozone members, slammed the rumor mill into top gear Tuesday when he said some form of restructuring of Greece’s debt was likely.
Juncker did note that Greece was expected to first pay down its debt by about fifty billion euros (US$70.6 billion). Once this requirement has been met however, Juncker said it was possible that the remaining debt could be restructured in a way to reduce Greece’s burden in paying back the rest of the debt.
Note however, that Juncker is not suggesting a deal that would forgive any of Greece’s outstanding debt. Rather, Juncker gave rise to the possibility of delaying payment as some securities reach maturity. Greek officials confirmed they may seek this option with Labor Minister Louka Katseli suggesting it could be possible to delay payment for some government-issued securities but only for those debt-holders open to the idea.
This approach is actually known as “re-profiling” and involves swapping short-term debt for longer-dated securities. The change in the maturity date results in a revision (i.e. “re-profiling”) of the yield curve for the securities and when conducted with the permission of the debt holder, re-profiling is not considered a credit even or a default on the original debt.
This “soft restructuring” as it was described by Greece’s Deputy Foreign Minister, is intended to differentiate between a complete abdication of debt and responsibilities and simply easing the conditions by which the debt must be repaid. Despite this, French Economy Minister Christine Lagarde was quick to voice opposition to any form of Greek debt restructuring. Lagard said that any action that could potentially harm the value of the euro was unacceptable.
Legarde’s hostility can be partly explained by the implications a re-profiling of Greece’s debt could have on other troubled Eurozone economies. Keep in mind that Greece was the first to accept a bail-out when it received 110 billion euros (US$155.5 billion) early last year; Ireland soon followed suite, and earlier this week, it was announced that Portugal would be provided with 78 billion euros (US$110.2 billion) in emergency funding. Does this mean we can expect these countries to also consider restructuring / re-profiling to deal with their debt burdens?
Finally, Juncker took great care to communicate that he did not foresee a “larger” restructuring that would presumably include an investor haircut. For now at least, it appears that some investors may be asked to delay payout, but investor assets appear free from the threat of a reduced payment.
Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog
