European Union and International Monetary Fund (IMF) officials arrived in Athens yesterday as rumours swirled around the markets that the IMF now favours a "restructuring" of Greece's crippling national debt – in effect a default. The IMF has denied this.
Tensions are also high because a widely expected rate rise by the European Central Bank this Thursday, from 1 per cent to 1.25 per cent, seems set to add to the troubles of all the peripheral eurozone economies by increasing the cost of servicing their debts and by depressing economic growth even further.
Reports in the German press had suggested that some in the IMF wanted the Greek government to "restructure" its debt soon – and default on the existing terms, conditions and returns attached to its debts.
Options are said to include "forgiveness" of some debt, extending the maturity of bonds, or lower interest payments. The IMF was supposedly keen on the Greek government talking to creditors soon, and wished these moves to remain confidential in case they exacerbated the precarious position Portugal now finds itself in.
Thus, almost a year after Greece received a €110bn (£97bn) loan from its European partners and the IMF amid riots as smoke rose from the Parliament building in Athens, there is little sign the country's agony is over. The sheer scale of Greece's debts (150 per cent of its GDP), the interest rates being charged by the markets and the IMF/EU loan, and its sluggish, uncompetitive economy labouring under the burden of spending cuts and tax hikes are pushing the country into a second crisis of confidence. The yields demanded on its sovereign debt remain at record highs of around 12 per cent for 10-year paper, while Portugal and Ireland are also feeling renewed pressure from the markets.
The new Irish government has openly called for a renegotiation of Greece's €87bn bailout and Portugal's caretaker cabinet has been defenceless in the face of the raids on its debt. Having been locked out of the capital markets, all the peripheral economies have been forced to borrow, via their private banks, from the ECB – hence the concern about a rise in rates. Credit ratings agencies have downgraded their bonds to junk status, and there is a feeling that a further rescue from the eurozone/IMF would fail to address underlying structural problems. Hence the seeming inevitability of default for Greece, and others, either on their sovereign debts, or bank debts, or both.