Yields on the Greek governments brand new bonds are
already trading at distressed debt levels suggesting
that despite Februarys bailout package investors still
see a strong chance that Greece will not be able to sustain
even its much-reduced debt burden.
As the first week of trading closed, yields on the benchmark
10-years were at 18.24 percent down from
Tuesdays closing high, but still the highest in the euro
The new bonds have replaced old Greek paper, under a
massive 206 billion ($273.5 billion)
exchange program that swapped old bonds for new ones carrying
The high yields the most elevated by far in the euro
zone reflect skepticism about whether the latest rescue
deal, based on an orderly default of Greek debt, is enough to
prevent a second default in the future. Last month private
sector creditors reluctantly agreed to an effective default of
75 percent of the value of their debt, in a deal masterminded
by euro zone finance ministers.
Assessing Greeces ability to meet its fiscal
challenge, Mike Turner, head of global strategy and asset
allocation at Aberdeen Asset Management in Edinburgh, said,
The aim of reducing the countrys debt-to-GDP ratio
from 160 percent to 120 percent by 2020 the
timetable envisioned by euro zone ministers when they put
together the second bailout package still looks an
impossible task without further write-offs.
The heart of Greeces problem is that it needs first to
halt a rapid decline in its gross domestic product which
could amount to 8 percent this year. Having achieved this
Herculean task, it must then start growing its economy
An expanding economy would boost tax receipts, allowing it
to pay down debt.
But achieving this is an extremely tall order for several
reasons, say analysts.
The cuts in spending made to close Greeces fiscal
deficit have already meant redundancies for thousands of
government workers, which has cut household consumption. As a
result, Greece is in its fifth year of economic contraction
one of the longest recessions suffered by a country in
modern global history. This has hit tax revenues forcing
even more cuts in spending that create a vicious cycle.
A second problem is that even in normal times, Greece lacks
the ability to generate fast economic growth for a sustained
Hans-Peter Keitel, president of the Federation of German
Industries, called in February for a new Marshall Plan
sponsored by German investors to reinvigorate the Greek economy
modeled on the U.S. program after the second world war
that boosted Europes economy by pumping money into
He made clear, however, that before foreign investors would
be willing to enter Greece, its government must create certain
structures essential to an efficient modern economy, such as a
well-functioning land registry and effective tax collection
features that took root in many other European economies
decades, if not centuries, ago.
In addition to the problems identified by Keitel, foreign
investors faith in the predictability of the Greek legal
system is so shaky that even hedge funds specializing in
distressed debt are often wary of entering the country to pick
up bargain assets.
Economies that are as inefficient as Greeces often
compete, instead, by offering goods and services at much lower
cost than their rivals.
But this is a tricky feat for Greece to pull off. It cannot
gain the necessary price advantage through letting its currency
devalue because, as a member of the euro zone, it does
not have its own currency.
An alternative pushing down wages aggressively in an
effort to compete through lower labor costs than rivals
could temporarily cut GDP even further by sending Greece into a
spiral of falling domestic demand and increasing unemployment.
This fear was raised by this years joint report on
Greeces debt sustainability by the European Central Bank,
European Commission and International Monetary Fund.
In other words, if Greece does not reform itself, its debt
may spiral out of control; and if it does reform itself, its
debt may still spiral out of control.
Many of these problems are common to other peripheral euro
zone economies stuck in the economic doldrums, including Italy
and Portugal. They are both suffering from the powerful
recessionary effect of spending cuts and tax increases,
uncompetitive economies, and an inability to address a lack of
competitive advantage through currency devaluation.
Investors are particularly fearful that Portugal could find
its debt burden unsustainable. It is just above 100 percent of
GDP and rising, despite a series of structural and fiscal
changes implemented by Vitor Gaspar, finance minister and
former senior official at the ECB, that could have come out of
a how to manual for economic reform written by the
Frankfurt central bank. Thursdays closing rate for the
Portuguese 10-year were, at 13.85 percent, 163 basis points
higher than in mid-February, before the bailout terms were
Jonathan Loynes, London-based European economist at Capital
Economics, the independent macro economic research consultancy,
said that while he remained worried about Greeces fiscal
sustainability, the focus will surely return to Portugal
later in the year as its first bailout nears an end.