Gentler terms do not mean soft option

Extending the timescale for Greek debt is a form of default that some bondholders will fight

THE EURO area sovereign debt crisis is not a short-term phenomenon. If it can be solved gradually and without the sort of shock that could trigger another earthquake for the real economy, it will continue for years.

But those who want a purging of bad debt are becoming more impatient. With three of 17 euro area countries being bailed out by the other 14, and the constant fear that the markets will turn against Spain, the purgists are putting forward various ideas for writing down debt.

There are different ways of imposing losses on those who have lent money to those who cannot repay. Outright default means not paying back some or all of the principal sum.

Restructuring is a gentler term for saying the same thing. Such a step is not on the cards until 2013, provided the current plan can be kept on track.

But with financial markets pricing in some sort of default in Greece before 2013 and that country’s prospects of borrowing again next year close to zero, an extension of the Greek rescue beyond three years is all but inevitable.

Voices in Germany in particular have sought to include some sort of reduction in the debt burden in return, if only to improve the chances of avoiding a third bailout.

The latest idea to gain currency is a “reprofiling” of Greek government bonds. This would mean that debts due to be repaid in, say, 2015 would not be repaid until much later.

But even this is unlikely. A government bond is a multi-page legal contract setting out the details of servicing and repayment. Any change to those terms – including a pushing out of maturities – would amount to a breach of contract.

That would classify as a “credit event”, the term used by rating agencies for default in its broadest term. It would be classified thus even if the reprofiling were to be voluntary, that is, if the bondholders agreed to it, which is highly unlikely. Not only would they have very little incentive to do so, but the perennial problem in such circumstances is that there will always be some bondholders who refuse to play ball.

Although the Greek economy unexpectedly grew in the first quarter of the year, the chances of it emulating Latvia’s recent Houdini act by returning to the bond market after a close call with default diminish by the day.