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The Global Radar Screen – 5/13/11
[private][private]The word “restructuring” is not as alarming today as it was just several months ago when thinking about Greece. For the moment European policymakers have decided that it is cheaper to hand Greece the money rather than have Greece default. But for those estimating that 5% to 10% of Greek GDP might be allocated to interest payments alone, it seems hard to conclude that the Greek populace will be willing to undergo the austerity needed to pay those bills. Greece’s economy has been contracting since 2008 and may decline 3% in 2011. This logic makes a restructuring more and more likely, either in the form of debt forgiveness, maturity extensions, and/or lower interest payments. This forces banks to accept losses, finally exposing the (not so hidden) truth that the European sovereign debt problem is a European banking problem. The more pessimistic think the outcome might eclipse Argentina, while others hope that the situation may be closer to Uruguay. In the former, investors took massive haircuts and Argentina is still struggling to return to international capital markets. In the latter, Uruguay reentered the credit markets in a matter of months as debt was mainly extended and investors took only modest haircuts. Unfortunately, the track record in Europe in dealing with the sovereign debt problems is not reassuring, making the outcome of the upcoming Eurozone finance ministers meeting even more nerve racking to investors.