Greece will probably have to restructure its debt again and this may involve bailout partners such as the International Monetary Fund, said Moritz Kraemer, head of sovereign ratings at Standard & Poor’s.
There may be “down the road, I’m not predicting Thursday when, another restructuring of the outstanding debt,” he said at an event in London late Wednesday. “At that time maybe the official creditors need to come into the boat.”
Speaking at the same event at the London School of Economics, Poul Thomsen, the IMF mission chief to Greece, said while the country has made an “aggressive” fiscal adjustment, it will take at least a decade to fully complete the country’s restructuring.
Caretaker Prime Minister Lucas Papademos won parliamentary approval on March 21 for a second 130 billion-euro ($173 billion) rescue program. Passage of the legislation moves the country a step closer to elections that may be held as early as next month. Greece pushed through the biggest sovereign debt restructuring in history earlier this month, paving the way for the bailout.
The temple of Parthenon is seen on top of the Acropolis hill in Athens as the Greek flag waves on Sunday. (AP-Yonhap News)
Thomsen said that after the elections, there is “no doubt it will have to reduce its fiscal deficit.” He also said it’s not clear when Greece will be able to return to markets.
“It remains uncertain, with this high level of debt and the risks the program faces because of possible resistance to reforms, when market access will return,” he said. “There’s no room for manoeuver or policy slippage.”
While the fiscal adjustment has been “unprecedented, very impressive, and undoubtedly socially very painful,” Thomsen said a “major adjustment is still needed, of 6-7 percent of gross domestic product.”
He said that if Greece doesn’t deal with the problem of tax administration, “I don’t see how over the long run it can maintain the social standards that are expected of a European country while maintaining control over its public finances.”
Kraemer said that the priority some creditors have been claiming, such as the European Central Bank, is complicating the ability of Greece to lower its borrowing costs and be able to return to bond markets.
“More and more official creditors have been jumping the queue and becoming so called preferred creditors, which means in the case of a restructuring they do not participate,” he said. For “the regular bond holders, the risk increases significantly. That means that the investor will demand a higher interest rate from Greece and that makes it harder for Greece and other countries on the periphery to establish a sustainable debt trajectory going forward.”
Preferred Creditors
Kraemer said that while making adjustments in a monetary union is “more difficult,” it’s not an impossible task “if the political preconditions and flexibility are there.”
European officials said this week that Greece must step up efforts to tighten the budget and overhaul the economy to prevent the second bailout from collapsing.
“Without a regime change in policy implementation and a much broader political consensus in favor of painful but necessary reforms, there is a high risk that the program derails,” ECB Executive Board member Joerg Asmussen said. “Political courage is needed more than ever.”
Asmussen’s comments were echoed by EU Economic and Monetary Affairs Commissioner Olli Rehn, who said that “challenges remain” as Greece seeks to cut its debt to around 116 percent of gross domestic product in 2020 from more than 160 percent of GDP last year.
(Bloomberg)