Greek Debt Problems: Still No End in Sight?

Once again, Greece’s debt problems made waves in the forex market as its debt problems hit the limelight. The country’s debt problem has been around for more than a year already, back when EUR/USD traded as high as 1.5100.

Have you already forgotten? No worries, I’ll remind you.

Greece’s debt problems first came out in December 2009, when its government revealed that the nation’s deficit rose to almost 300 billion EUR – almost 110% of its GDP. The amount was arguably very large, which made investors doubt the nation’s fiscal credibility.

Because of this, Greece was left with no choice but to ask for help elsewhere. On April 23, 2010, the Greek government finally asked the European Union (EU) and the International Monetary Fund (IMF) for a bailout worth 45 billion EUR. They also implemented austerity measures to reduce their spending. Five days after, Greece’s sovereign credit rating was downgraded to BB- (i.e., junk status).

Fast forward a year and a half, despite all the action the EU/IMF and Greece’s government have taken, the nation is still burdened with same ol’ problems. In fact, I dare say their problems have gotten worse due to IMF Managing Director Dominique Strauss-Khan’s arrest and the market speculating that Greece will have no choice but to restructure its debt.

“Restructure debt” may not sound doomsday-ish, but it’s very serious! It’s just another way of saying “Dude, I can’t pay a billion dollars I owe you… Can I pay next time?”

If you didn’t get a chance to read my entries on how talks of Greek debt restructuring spooked the markets and the other funding alternatives Greece can consider, here’s the lowdown on debt restructuring:

You see, even though restructuring can allow a debt-ridden country to ask for a reduction in its current payments, it brings back fears of debt contagion to its neighboring countries. It doesn’t help that the fiscal situation in the rest of the PIIGS nations just seems to keep getting worse. Just take a look at what’s happening in Spain now!

On top of that, as increased skepticism over Greece’s ability to repay its debt weighs on the markets, bond yield spreads widen further. That would make it even more expensive for Greece to pay off its debt. Is it just me or are you also seeing a vicious cycle right here?

This is probably why EU officials and ECB policymakers are sitting on opposite sides of the fence with this restructuring issue. Some are arguing for a soft restructuring, which only involves extending their debt repayment period, while others insist that this method would be bad for their bond ratings. Well, they better see eye to eye soon because Greece can’t afford to be sitting on its hands for long!

The good news is that the Greek government is starting to put more effort in lowering its deficit. In order to pump up revenue, they decided to approve new fiscal measures, fast-track their privatization plans, enhance its tax collection procedures, and create a Sovereign Wealth Fund. Now that’s what I call stepping up!

While it’s too early to tell whether their new tactics will work or not, these are certainly steps in the right direction.

Do you think these moves will be enough to keep Greece from defaulting? Cast your votes in the poll below!