Greece headed for restructuring as CDS spread spikes again

Credit specialists anticipate Greece could be forced to restructure its debt within a few months, following a day in which its five year sovereign credit default swap spiked from 485.7 basis points to 638.9bp.

One European macro credit strategist says: “It is completely unrealistic to hope the financial markets are suddenly going to regain confidence and start providing lending to Greece. I do not think there is any option other than a debt restructuring.”

The dramatic widening in CDS spreads is further evidence investors are unconvinced Greece will be able to address its fiscal problems, despite the announcement of a Eurozone-International Monetary Fund bailout package on April 11. In fact, Greece’s CDS spreads have moved out 75.5% since then, from 364bp to 638.9bp.

Goldman Sachs’ chief European economist Erik Nielsen says a voluntary debt restructuring would give the Greek government breathing space to undertake the necessary reforms. In a research note, Nielsen described a restructuring as the “the best case scenario for how this will all pan out”.

According to Nielsen, the Greek government faces a financing gap of about €51 billion during the next 12 months. However, the IMF-Eurozone bailout will only provide a maximum of €45 billion. In the short-term, Greece has €1.6 billion in treasury bills maturing this month; another €8.1 billion of bonds maturing in the middle of next May; and a further €355 million due at the end of next month.

Industry participants say that unless lenders are prepared to roll some of these maturities into new instruments at interest rates comparable to the (roughly) 5% rates offered by the EU and the IMF in their bailout package, Greece will have little option but to seek support.

In addition to spiking CDS levels, Greek government bond yields continue to widen dramatically. For example, the yield on its most recent deal - a €5 billion seven-year issue that closed on March 29 - has moved out from 6.674% on April 12 to 9.374% on April 22. Investor confidence in Greece is likely to have been shaken further by Moody’s Investors Service’s announcement on April 22 that it was downgrading the country’s sovereign rating from A2 to A3.

Should Greece be forced to go down the restructuring route, it could find its access to the capital markets closed for an indefinite period. Erick Muller, product director for fixed income at Fidelity International, says no investor would wish to purchase new bonds knowing a restructuring was a likely outcome.

As for its existing debt, one investor put forward an innovative proposal for how a restructuring might work and appease bondholders. Paul Marson, chief investment officer of Lombard Odier Private Bank, suggests a debt-to-equity conversion, where outstanding debt would be swapped for an equity stock in currently state-owned Greek businesses, such as banks, utility companies and industrials.

Marson says the prospect of privatising swathes of the Greek public sector might be “politically unpalatable” to a socialist government, but says the plan is otherwise feasible. “Goldman Sachs and the like would be falling over themselves to do this business, helping to carve up, privatise and securitise all of these public assets. It would be fairly straightforward,” he says.

He adds a debt-to-equity conversion would be better for bondholders than the prospect of simply having their debt wiped out, or subject to a severe haircut.

However, Andy Howse, investment director for fixed income at Fidelity International, warns that any form of restructuring could have an “ugly knock-on” for other peripheral Euro sovereigns.

The cost of credit protection for both Portugal and Spain hit new highs on April 22. Portuguese CDS spreads closed at 276.2bp, with Spanish CDS ending at 171.6bp.