I’m not sure why everyone thought comments the other day from the German Finance minister, Wolfgang Schäuble, to the effect that Greece may eventually face a sovereign debt restructuring, were such a revelation. This is in fact only a statement of the blindingly obvious, has been apparent in the market price of Greek sovereign debt for more than a year now, and was in any case implicit in the statement issued after the European Council meeting of March 24-25, when ministers said restructuring would be a pre-condition to borrowing from the European Stability Mechanism if debt was judged to be on an unsustainable path. Even so, combined with the latest Moody’s downgrade on Friday of Irish sovereign debt, his comments have sparked a fresh round of jitters in markets, and led some commentators to think an act of default among the peripheral eurozone economies is imminent. I don’t doubt that certainly Greece, and possibly Ireland and Portugal will eventually have to restructure, but here’s why it’s not going to happen any time soon.
First and most important, none of these countries are yet willing to contemplate such a radical course of action. It’s possible that political developments in Europe could force such an outcome on them sooner rather than later; there is every chance, for instance, that Sunday’s election in Finland could produce a government hostile to any future bailouts, and therefore scupper the proposed Portugese rescue before it’s up and running. Things might quickly unravel if Finland refuses to take part in bailouts. (read more)
