The costs of a restructuring of Greek debt in the near-term would far outweigh the benefits - both for the country and the Euro area, according to asset manager Schroders.

Last week Moody’s Investors Service downgraded Greece’s local and foreign currency bond ratings to ‘Caa1’ from ‘B1’, and assigned a negative outlook to the ratings.

In a note, head of European and UK interest rate strategies at Schroders David Scammell said many investors have taken the view that a restructuring of Greek debt is desirable in the near term.

“The main argument in favour of such a move is that postponing the inevitable merely makes the restructuring more painful in the future. Moreover, it is already priced into the markets.”

Scammell said a restructuring could “arguably” reduce market uncertainty as investors are forced to crystallise losses, and would put a limit on the financial exposure of the rest of the Euro area to Greece, avoiding moral hazard.

However, despite the potential benefits Schroders does not believe a restructuring would be favourable.

“First, it would not solve any of Greece’s income or balance sheet problems. More likely it would worsen the problem by exaggerating the headwinds on Greek growth - damaging the domestic banks and eroding wealth and confidence. Another adverse consequence would be the reduced access to external funding and a higher cost of borrowing for not just the government, but also for Greek banks, corporates and exporters,” Scammell said.

Of wider consequence, however, was the destabilising effect a restructuring could have on bond markets, and the associated contagion effects on other periphery countries.

Scammell said restructuring would see attention turn from Greece to the other peripheries, with investors revising up the probabilities that they assign to restructuring elsewhere.

“This would obviously be very bad news for the Euro area. We suspect that most politicians appreciate this danger and that is why we do not envisage any debt restructuring or maturity extension this year. Rather we suspect that the way forward will ultimately be the full socialisation of peripheral debt – in other words, a long drawn-out process of fiscal transfers from sovereigns that are still solvent,” he said.

Share Story: