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Monday, April 18, 2011

Extend and Pretend Greek Style

by Calculated Risk on 4/18/2011 05:59:00 PM

Landon Thomas at the NY Times discusses how a possible restructuring might work: Talk of Greek Debt Restructuring Just Won't Die

One option that has attracted some attention, though, is a plan that would ask bond holders to trade in their current paper for debt with lower rates and longer maturities.

Such a proposal, which was successfully deployed by Uruguay in 2003, would, in theory, minimize banking losses and extend debt payments further into the future, easing Greece’s financing burden in the near term.
Last week, in a Bloomberg article, German Finance Minister Wolfgang Schaeuble was quoted concerning a report due in June on Greek debt sustainability:
“We will have to do something” if the review by the International Monetary Fund and European authorities in June raises doubts about Greece’s “debt sustainability,” Schaeuble was quoted as saying. “Then, further measures will have to be taken.”
It seems unlikely that anything will happen until after the report is released in June.

The yield on Greece ten year bonds jumped to 14.5% today and the two year yield is now up to 20.3%. The curve is inverted because investors expect to wake up one morning and own longer maturity debt at lower rates. This possibility hits the price of the 2 year bond more than the 10 year.