Greek debt costs spike on debt restructuring fears

Greek borrowing costs spiked sharply higher Thursday as investors fretted over whether the crisis-hit country will have to restructure its massive debt at a time when unemployment is running at over 15 per cent.

Particularly notable was the spike in the yield on Greece's 10-year government bonds to over 13 per cent for the first time since the country joined the euro in 2001. That means the interest rate gap, or spread, between Greece's 10-year bonds and those of Germany, which are considered the benchmark, hovered just below 10 percentage points.

Analysts said the catalyst to the renewed bout of jitters were reported comments from German Finance Minister Wolfgang Schaeuble that Greece may have to take additional steps to deal with its finances as soon as June.

"Investors have been spooked by comments from the German finance minister, who said that Greece may need to negotiate with creditors in June," said Nick Bennenbroek, an analyst at Wells Fargo Bank.

Big austerity measures

Greece is being kept afloat until 2013 by a package of three-year loans worth €110 billion. In return for the money, the Greek government has had to enact big austerity measures, including big spending cuts and tax rises, which have kept the country mired in a deep recession.

The severity of the recession was evident in figures earlier from the Greek Statistics Authority, showing the jobless rate rising to 15.1 percent in January from 14.8 the previous month. January's rate is the highest level of unemployment since the statistics agency began issuing jobless figures in 2004. The total number of Greeks out of work stood at 756,795.

The scale of Greece's economic headwinds don't look like they are going to get any easier any time soon. The Socialist government is drawing up additional budget cuts of at least €23 billion ($33 billion) for the three years from 2012 to meet its deficit reduction targets.

The task at hand is so huge that many are openly pondering the possibility that the government will have little option but to seek to renegotiate the actual level of its debts with creditors.

Comments from Germany's Schaeuble in the Die Welt newspaper certainly helped fuel those concerns.

Schaeuble told the newspaper that if the next progress report on Greece in June calls into question its ability to pay its debt, then unspecified "further measures" would be in the offing if an upcoming June assessment indicates the country cannot make its debt repayments.

"Should this report come to the conclusion that the sustainability of the debt is called into question, then one has to do something," Schaeuble told the newspaper. "Then further measures must be taken."

Asked if that meant a restructuring, Schaeuble said any restructuring would have to be agreed voluntarily. European leaders ruled out losses for bondholders under the current, temporary EU bailout fund, but will allow such losses, or haircuts, under bailouts from the new rescue fund that take effect in 2013.

The government line, though, remains the same. There will be no default, no renegotiate and growth will return.

"We are at the lowest point of the recession," said Greek government spokesman Giorgos Petalotis. "We are on course to return to growth next year and that will bring a pickup in the job market."

Petalotis insisted that the economic programme is paying off.

"We have avoided the danger of bankruptcy," Petalotis said. "Now many of the same people who made that prediction are talking about restructuring. I wonder if all of those people actually understand what restructuring means."

- AP