Return of the Greek tragedy

GREECE was hammered by multiple ratings agencies yesterday following the EU’s admission on Friday that Athens will not be ready to return to markets for cash next year, as is required under the terms of its €110bn (£96.2bn) bailout.

S&P downgraded Greek debt to B, one notch above Pakistan’s bonds, while Moody’s threatened a several-notch downgrade imminently and Fitch kept the sovereign on a negative outlook rating.

With Greece facing a €27bn funding shortfall next year, a restructuring of its bailout funds has become inevitable. But S&P says that any restructuring is also likely to involve “burden sharing” by private creditors, making it a “selective default”.

The agency also put all of Greece’s major banks on review due to their exposure to the sovereign.

Greek Labour minister Louka Katseli yesterday conceded that the government has returned to Brussels cap in hand after failing to control its spending: “The initial plan was to return to markets in 2012. At this moment this appears difficult,” she said.

With yields on Greece’s two-year debt over 25 per cent and at 15.7 per cent on its ten-year notes, “difficult” looks like an understatement to the markets, which are awash with rumours that the EU is drawing up emergency plans for Greece’s exit from the euro.

Athens’ problems are compounded by forecasts that its economy will shrink three per cent this year, in part due to austerity measures. Portugal is also forecast to stay in recession, shrinking two per cent.

A second bailout for Athens after it failed to meet its deficit targets last year will cause ripples of anger across the Eurozone, particularly in the region’s paymaster states.

The UK will be on the hook for five per cent of any cash given by the International Monetary Fund and 13.5 per cent of money given through the EU’s bailout fund.

Ben May of Capital Economics said: “Core governments will be unwilling to go on providing bailouts to Greece indefinitely and… as a result, we continue to think that a major debt restructuring will eventually take place.”

Analysis by JP Morgan has concluded that the ECB could face a €35bn hit from a Greek default, if haircuts of 50 per cent were imposed, a scenario that S&P says “could eventually be required”.

But the impact of an Irish default on the Eurosystem’s finances would be worse still. Dublin is determined to restructure its €85bn bailout loan, which has a higher interest rate than Greece’s rescue funds or those likely to be lent to Portugal.

“There is no doubt that a reduction in the interest rate on the moneys we are borrowing from Europe would be a meaningful and appreciated measure,” said Irish Prime Minister Enda Kenny, who was elected on a platform of renegotiating Dublin’s bailout package.



Interest & Maturity: 5%, revised to 4%.

Bailout maturity increased from initial 2013 to 2017.

Conditions: Have had to be revised repeatedly after Athens failed to meet targets. €30bn in savings by 2014, including increasing VAT rate to raise €1bn, freezing public sector pensions. 2011 deficit target of 7.6% of GDP.


Interest & Maturity: 5.8%, there is talk of revising it downwards. 2014-2015 maturity.

Conditions: Four year plan for €10bn in spending cuts, including €2.8bn cut in social welfare expenses and public sector headcount cuts to 2005 levels. €5bn in tax hikes. 2011 deficit target of 9.1% of GDP, excluding bank costs.


Interest & Maturity: Yet to be decided, but is likely to be between 3.25% and 4.25%. 2013 maturity.

Conditions: €12bn to re-capitalise banks, €5bn’s worth of privatisations, extensions of higher-VAT rate, freeze on public sector wages and pensions, public sector headcount to be cut. 2011 deficit target of 5.9% of GDP.