Outlook So who is right about Greece? The European Central Bank's leading lights insist that a restructuring of the country's debt, let alone a full-scale default, is unthinkable – the ECB's Christian Noyer described the idea as a "horrorstory" earlier this week. Politicians across Europe, however, have begun talking about "soft restructurings" and "reprofilings". And economists such as Nouriel Roubini say a restructuring is not only desirable, but not necessarily even of great consequence – he derided the ECB as "dogmatic" yesterday.
Mr Roubini has even laid out a mechanism for how a restructuring might work. In simple terms, holders of Greek debt would simply be given new, longer-dated paper in exchange for their existing bonds. Greece would get longer to pay off its debts, while Europe's banks would not be plunged into crisis by having to make substantial writedowns on the value of their exposure to the country's sovereign debt (one of the prospects that so alarms the ECB).
One can see the argument, though it is not clear how this solution would avert the rest of the horror story Mr Noyer foresees. He worries that were Greece to embark on such a restructuring, it would find the money markets closed to it for an extended period – in which case how would it fund its ongoing deficits without further bail-outs and defaults?
Whether or not Mr Roubini's proposal is the best way forward, however, Greece cannot continue with the status quo. The deficit deniers, to borrow a phrase, must eventually face up to some home truths. First, that Greece is already denied access to the debt markets, which want an interest rate of 15 per cent to lend to the country. Second, that this means another round of support from the EU and the IMF, with no reason to think the cycle will not continue indefinitely. And third, that Greece's political tensions are now such that the country may not be able to implement even the full programme of reforms to which it has already agreed, let alone make the sort of new gestures that may be required to secure extra funding. The country's political party leaders meet today for talks, but a deadlock is likely.
The ECB's insistence that even the softest of restructurings in Greece is not acceptable is understandable. Not only is it concerned about the impact on Greece itself, it also has to worry about precedent-setting – not to mention its own substantial exposure to the crisis via the €40bn plus of Greek bonds it has acquired in attempts to ease market tensions.
The trouble is that no-one really believes the bank can hold the line – the numbers simply do not add up. And the longer it takes for the ECB to recognise this – the worse the kicking and screaming as it is dragged towards restructuring, in other words – the greater the damage will be when it is finally forced to admit defeat.Reuse content