Somewhere along the line, Greece and probably Ireland and Portugal are going to have to restructure their debt. It is almost inevitable because all other options that would effectively help avoid restructuring don't seem to work. Those "options" would be:- A sharp rise in taxes, which will probably only lead to a further paralysis of the economy, especially given the chronic level of tax evasion in a number of the peripheral countries involved.
- A devaluation of the currency which unfortunately is no longer an option for the countries of the Euro-zone given that they no longer have this tool at their disposal.
- An internal form of devaluation which is effectively a sharp and sustained cut in wages across the board. As with a hike in taxes, such a move would be so deeply unpopular that it would provoke more riots that would plunge the respective economies into further turmoil.
- A sharp cut in fiscal expenditures or the infamous austerity measures. This is yet another "dead in the water" option as it is unlikely to resolve the debt problem on its own and would also contribute to weakening the other options such as tax income further.
Given the above, it becomes clearer that the only viable option would be some form of restructuring. But then again, there are different shades of restructuring to choose from and the outcome can be materially different depending on which one is selected. At one end of the spectrum is the more painful approach of applying a "haircut" which is effectively paying back a fraction of the original value of the debt. This would force the various banks to take losses by writing off a large amount of debt in their books. At the other end is a softer technique known as "reprofiling" which is effectively to extend the maturity of the bonds and by doing so, buy precious time for the troubled governments. This option, which seems to be the one favored by the core European countries, begs the question as to how exactly buying additional time would resolve the problem. Considering that the various alternative options are likely to be ineffective, the only effect of buying time will be to postpone the inevitable to a future date.
This brief analysis clearly suggests that restructuring is the only viable option at the table. The question to be asked is what form of restructuring will be applied and when will it take place.
