Greece’s deepening debt crisis

The wax melts

Worries about Greece’s ability to roll over its maturing debt are giving way to bigger fears

GEORGE PAPANDREOU may have spoken too soon. On April 6th, just three days after the Greek prime minister claimed “the worst is over,” the yield on Greek ten-year government bonds leapt from 6.5% to above 7%. Yields remain at alarming levels, rising above 7.5% at one point on April 8th. The president of the European Central Bank, Jean-Claude Trichet, told a press conference that “default is not an issue for Greece.” But the D-word is increasingly on the lips of analysts. The cost of insuring Greece’s bonds surpassed that of Iceland’s this week; Greek banks have asked to tap a government liquidity scheme. Far from coming to an end, the Greek debt crisis seems scarcely to have begun.

On the face of it, this week’s renewed bond-market jitters were caused by growing doubts that an emergency-aid package patched together by European Union leaders last month offers Greece much help. Under the terms of the EU deal, any short-term support would have to be approved by all of the 16 countries in the euro zone. German anger at Greece’s profligacy could easily delay the cash it would need should bond markets close.

Any rescue package would be co-financed by the IMF, which may be good for 12 billion ($16 billion) of swift support. But the stipulation, insisted on by Germany, that EU cash would only be furnished at near-market rates meant the deal failed to provide an interest-rate ceiling for Greece’s public debt, leaving the country to suffer every turn in market sentiment. Senior EU sources say a formula is being discussed to address this flaw. The interest- rate benchmark would be set over a long period, so it would not be unduly influenced by immediate market stresses. Rates paid by countries with a credit rating similar to Greece’s would also be a factor.

Optimists are still confident that the government can raise enough funds in the next six weeks to stave off default, though at a high cost. The government has more than €13 billion in cash, enough to refinance maturing debt and fund the budget deficit during April. It needs to raise another €10 billion-12 billion in May. The likely borrowing requirement for the remainder of the year, around €25 billion, is spread more evenly. “If we can get over the May borrowing hump, it’s a relatively smooth cruise for the rest of the year,” says one trader in Athens.

That is a big “if”, say pessimists. In the six months since the Socialists were elected, spreads have jumped by more than two percentage points. Greece can no longer risk holding an auction for a new issue of bonds for fear that it fails. Its Public Debt Management Agency has resorted to syndicated-bond sales managed by big international banks. But the pools of spare cash that Greece can tap seem to be drying up.

George Papaconstantinou, the finance minister, plans to lead a roadshow to America in the last ten days of April. He hopes to persuade American investors, including emerging-market funds, to buy $5 billion-10 billion worth of a new dollar-denominated bond. It would be a heavy irony if Greece, a member of the euro club, were temporarily reprieved by loans in dollars. But the fear is that investors will stick to buying the bonds of genuine emerging markets, which have much more solid growth prospects.

It is not yet clear what Greece’s fallback plan will be if American demand is weak. “The roadshow will be decisive. If it doesn’t fly, the alternative is either a wave of T-bill issues at very high interest rates, or a rescue package,” says a senior Greek banker. Mr Papaconstantinou insists that Greece does not plan to fall back on support from the EU and IMF. But he also accepts that the government cannot go on borrowing at such high interest rates.

Even at lower interest rates, however, Greece will struggle to keep borrowing. Previous analysis of the country’s debt dynamics by The Economist, based on fairly benign assumptions, concluded that Greece’s public debt would stabilise above 150% of its GDP. That burden is probably too much to bear for a small country with such ropy economic prospects: it also implies that a much bigger bail-out pot is needed than the one currently being mooted. Some buyers of Greek debt may still think the interest rewards on offer are worth the default risk, but they seem to be a diminishing band. The bigger worry for Greece is not its immediate funding hump, but that investors are starting to lose faith that the country will be able to sustain its growing indebtedness.