Record spike in EMU default risk on Portugal downgrade and Greek restructuring scare

The cost of default insurance on eurozone bonds has surged to an all-time high on reports that Greece is preparing the way for a sovereign debt restructuring after 2013, with tacit support from the EU authorities.

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Ambrose Evans-Pritchard
Telegraph

The disputed claim came as Fitch Ratings downgraded both Portugal and Hungary and placed five Greek banks on negative review.

Fitch cut Portugal’s rating one notch to A+, warning that the economy is caught in a low-growth trap.

Plans to cut the structural budget deficit by 4pc of GDP next year “will be extremely challenging especially if, as Fitch expects, the economy falls into recession next year”.

The Greek newspaper Ta Nea said Athens was examining plans to impose a cut in interest rates on its debt and to extend maturities once the €110bn (£94bn) rescue deal from the EU and the International Monetary Fund expires in mid 2013.

The proposals stop short of “haircuts” on the principle of the debt and would be done in a co-operative fashion with bondholders. While this would qualify as an orderly restructuring of debt, it is tantamount to default.

Ta Nea said Brussels had given a “green light” to the idea, provided that Greece complies with the terms of its fiscal austerity package and carries out deep structural reforms.

The European Commission denied that it had given its blessing for “any restructuring of government bonds by Greece or anywhere else”.

The claims caused a wild spike in credit default swaps for Greek debt, with ripple effects across the EMU periphery. Markit’s iTraxx SovX Western Europe index measuring risk on sovereign debt in the region surged to a record 208 basis points in intra-day trading, though the moves may have been distorted by a lack of liquidity in the run-up to Christmas.

If Greece becomes the first country in developed Europe to restructure sovereign debt since the Second World War, it breaks a powerful taboo and risks opening the floodgates to serial defaults in southern Europe and Ireland.

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