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Next Phase of Global Sovereign Debt Crisis, Greek Government in Denial

Interest-Rates / Global Debt Crisis Apr 18, 2011 - 01:09 PM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleA Greek newspaper reported that Greece is in talks with the IMF regarding debt restructuring. However, Greek Finance Minister issued this denial "Restructuring is not an issue we’re discussing".

Last week, the media went gaga over a no-news announcement from German officials that restructuring was on the table. It should not have caused a stir because anyone watching the market knows perfectly well a restructuring is coming. Denials from Greece cannot stop it.

Why the Denials from Greece?

Inquiring minds are likely asking "Why does Greece insist it will not restructure?"

The answer is simple: Greek public pension plans are loaded with Greek sovereign debt garbage. A restructuring would shatter the values of those plans and the expected payouts to the pensioners.

However, the market does not care what Greek or IMF officials think. Nor does the market care about those pension plans. A yield of 20.34% on the 2-year government bond is proof enough.

This is what happens when the market takes matters into its own hands.

Greek 2-Year Sovereign Debt Yield

Greece Denies Restructuring Plan

Bloomberg reports Greece Denies Restructuring Plan as Traders Raise Default Bet

Greece said it has no plans for a debt restructuring even as German officials openly discuss the possibility and investors charge a record amount to insure the country’s obligations.

“Restructuring is not an issue we’re discussing,” Greek Finance Minister George Papaconstantinou said in an April 16 interview in Washington. “The pain and the cost” of doing so would be greater than repaying lenders, he told reporters the same day.

Traders are betting on a default. The cost of insuring Greek sovereign debt jumped 56 basis points today to a record 1,211 points, according to CMA prices for credit-default swaps. That indicates there’s a 64.5 percent probability of default within five years.

Greece’s aid program was designed on the assumption that the country would repay debt rather than restructure, and “nothing has changed,” Strauss-Kahn said as he hosted the IMF’s semi-annual meetings in the U.S. capital. Lagarde said April 14 at the same talks that “there is no discussion about debt restructuring, none whatsoever.”

Greek newspaper Eleftherotypia reported today that Papaconstantinou brought a request to extend the maturities of all the country’s debt to a meeting of European Union finance ministers in Hungary on April 8-9 and to representatives of the EU, European Central Bank and IMF who visited Athens in April. A Finance Ministry press officer in Athens, who declined to be identified citing government policy, denied the reports.

The Wall Street Journal reported that IMF officials believe Greece’s debt burden is unsustainable and should be restructured. William Murray, an IMF spokesman, said yesterday that “there is absolutely no truth” to the report. German Finance Ministry spokesman Bertrand Benoit declined to comment today.

Next Phase of Sovereign Debt Crisis

MarketWatch reports Finland, Greece spark new Europe debt fears

In Finland, a strong showing by the anti-euro True Finns party in Sunday’s national election raised fears that the country of 5.4 million could slow or even block a pending European Union–International Monetary Fund bailout package for Portugal.

Meanwhile, a Greek newspaper reported that Greece has asked the IMF and the EU to begin talks on restructuring its debt. A Finance Ministry spokesman subsequently told Reuters that the report wasn’t true.

“We seem to be moving into the next phase of the sovereign-debt crisis in Europe where debt restructuring comes to the fore,” said Kathleen Brooks, research director at “This is going to be the most painful part of the crisis, and although it will most likely be played out in the credit markets, it has the ability to disrupt the euro as we have seen in recent days.”

Ireland Denies Default Concerns

In Ireland, Prime Minister Kenny Says Ireland Won't Default

Irish Prime Minister Enda Kenny said the nation won’t default on its debt as he tries to rebuild confidence at a time when investors speculate Greece may struggle to pay back its borrowings.

“The Greek government will obviously deal with this problem in the best way it can,” said Kenny, 59, in an interview with Andrea Catherwood on Bloomberg Television’s “Last Word” in London today. “We have no intention of defaulting. We’ve made that perfectly clear. We want to continue to pay our way.”

Kenny said Ireland’s government has “plenty of time” before interest payments due in October or November “to demonstrate the seriousness of intent” about tackling the country’s banking and fiscal problems.

“We believe that growth projections and initiatives that were taken will lead Ireland to a position where we fix what’s been broken” and generate economic growth, he said.

Irish citizens voted overwhelmingly for change. Kenny has to be a huge disappointment. Once again the only country that handled matters correctly was Iceland. Voters rejected "Icesave" a second time. Please see Icelandic Voters Reject "Icesave" Again, Effectively Telling UK and Netherlands Banks "Go to Hell"; Iceland's Common Sense Stance

Icelandic voters want no part of "Icesave". Even the name "IceSave" is preposterous. Iceland was save by the fact voters rejected "Icesave". Icelanders would have been debt-slaves for decades had they accepted the original terms.

How many times do citizens have to say no? Hopefully voters give Prime Minister Johanna Sigurdardottir a well-deserved boot in the next election. My ending statement in that piece was "Banks that make stupid loans should suffer for them, not taxpayers. So far, Iceland is the only country that has taken this common-sense stance."

The word "banks" might be better phrased as "people", although both statements are true.

Depositors chased high yields in Irish banks that went under. Deposits are loans to the bank. Those loans, as depositors found out are not risk-free.

It does not matter whether poor loans are made by banks, individuals, or governments. Those who chase yield or make loans in general, have default risk. In this case, the UK government foolishly decided to guarantee those deposits and now the UK government (UK taxpayers) are on the hook for the losses.

The citizens of Iceland did the right thing. I commend them for refusing to bailout private citizens and/or foreign governments for making poor loans.

This mess will undoubtedly be settled in international court.

By Mike "Mish" Shedlock Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2011 Mike Shedlock, All Rights Reserved.

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