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Bid for debt rollover ‘won’t close Greece’s solvency gap’

EU attempts to persuade holders of Greek government bonds to roll over the country’s debt ‘voluntarily’ will fail to make Greece solvent, a senior Barclays Capital economist has warned.

Bid for debt rollover ‘won’t close Greece’s solvency gap’

EU attempts to persuade holders of Greek government bonds to roll over the country’s debt ‘voluntarily’ will fail to make Greece solvent, a senior Barclays Capital economist has warned.

Piero Ghezzi, head of economics, emerging markets and FX research at BarCap, made the comments today as EU leaders gathered in Brussels to pressure Greece to adopt deeply unpopular austerity measures in return for fresh funds to avert a bankruptcy.

Ghezzi described the country as ‘pretty much insolvent,’ pointing out that it cannot generate a sufficient primary balance to service its debt.

‘The existing proposal of having some sort of debt, or voluntary debt, rollover just can’t close that solvency gap,’ he added, amid EU efforts to coax banks and insurers into maintaining their exposure to Greek debt when their bonds mature, or rolling them over.

‘A voluntary debt rollover means that you basically lend [to] Greece at current market rates,’ Ghezzi said, pointing out that ‘if you want to start lending to the Greeks at current market rates – you would be lending at 20%.’

The economist was speaking at a meeting at BarCap’s central London offices to unveil its quarterly Global Outlook report, in which it recommended investors ‘stay the course’ and avoid ‘underweighting risky assets’ – despite the risks associated with fiscal consolidation in the United States and Europe.

At the briefing, Ghezzi likened Greece’s situation to that of Argentina in 2001. ‘They postponed their payments, pretending it was a liquidity problem when it was a solvency problem,’ he said. ‘And that postponement of their payments meant that they locked [in] interest rates of 15%.’

He added: ‘If you have to pay interest rates of 15% on your debt, basically you become bankrupt almost by definition. So that accelerated a debt restructuring.’

Meanwhile, BarCap’s chief southern European economist, Antonio Garcia Pascual, warned over the risks of contagion in the event of a Greek debt restructuring.

He said: ‘I think it will be very difficult for the policymakers to avoid the internal request that if Greece gets debt relief, why should the Irish and Portuguese go along with their massive fiscal consolidation plans?’

Paul Robinson, head of FX strategy at BarCap, noted that should Greece succeed in deferring its debt problems, the euro would benefit ‘a bit in the short-run,’ due to the current ‘heightened uncertainty’ in the markets.

‘But we would not suggest that people rush out and buy euros willy-nilly,’ he added. ‘Because of the risks… there are so many uncertainties out there. It is the only real issue out there which combines political risks, legal risks, societal risks, economic risks, financial risks all in one neat, messy package.’

3 comments so far. Why not have your say?


Jun 23, 2011 at 18:45

Regrettably, stating the obvious, something which is way above the intelligence level of the politicians involved in the decision making, or even those who set up what is turning out to be a variant of a ponzi scheme......

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david Bhatti

Jun 24, 2011 at 08:07

I would like wait and see how well Greece gets on with the implementation of the austerity measure. It looks so difficult. I wish them my very best.

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John Coles

Jun 24, 2011 at 09:23

Wish away but nothing other than leaving the EURO and adopting a new, weak Drachma will correct Greece's INSOLVENCY.

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