* Bonds dive on Greek restructuring talk
* Schaeuble says new steps may be needed on Greek debt
* Lagarde, ECB say deny restructuring on agenda
* Portuguese union warns, Spanish banks eyed
(Adds Lagarde quote)
By George Georgiopoulos
ATHENS, April 14 Greek borrowing costs soared
to new highs on Thursday and pressure rose on other financially
weak euro zone countries after Germany suggested for the first
time that Athens may have to restructure its large debt load.
European policymakers scrambled to reassure investors that
a restructuring for Greece was not on the agenda, saying such a
step could have dire consequences for European banks and the
fragile economy of the 17-nation euro zone.
The Greek government also ruled out a restructuring, vowing
to deliver on the ambitious fiscal goals set out for it by the
EU and International Monetary Fund last year in exchange for a
110 billion euro ($160 billion) rescue.
Efforts to quell fears came after German Finance Minister
Wolfgang Schaeuble became the first senior euro zone official
to acknowledge publicly that restructuring may be a
French Finance Minister Christine Lagarde said no talks
about restructuring Greece's debt were under way and that
Athens was working hard to get its fiscal house in order.
"There is no discussion of debt restructuring as far as
Greece is concerned. None whatsoever," Lagarde told reporters
in Washington ahead of a meeting of Group of 20 advanced and
But doubts have grown in recent weeks about whether Greece
can achieve those targets and restore confidence in time to
return to capital markets for funding next year.
With a debt mountain that is expected to approach 160
percent of annual output by 2013 and EU/IMF money due to run
out that same year, some move to reduce Greece's debt burden
such as reducing or postponing repayments to its bond investors
looks increasingly unavoidable.
A Reuters poll on Thursday showed analysts believe there is
a 60 percent chance Greece will have to restructure its debt in
the coming years. They put the chances for Ireland at 40
percent and Portugal at 30 percent. [ID:nSLAEFE7SZ]
Schaeuble, who made his remarks in an interview in the
Thursday edition of German newspaper Die Welt, said "additional
measures" to deal with Greek debt would be needed if a report
due in June showed it was unsustainable. He said any
restructuring would have to be done on a voluntary basis before
2013, when new EU rules take effect that could compel private
investors to shoulder losses. [ID:nLDE73C28V]
German officials later tried to play down the comments,
which contributed to a surge in Greek bond yields. Two-year
debt GR2YT=TWEB rose above 18.3 percent, 10-year bonds hit
13.4 percent and the cost of insuring five-year Greek debt
against default pushed up to a record high of 1,070 basis
Spanish bond yields, which have remained steady since
neighbour Portugal announced last week it would follow Greece
and Ireland in seeking a bailout, also edged higher.
For an Interactive timeline on Eurozone debt crisis in the
last year please click on link.reuters.com/xur78r
On Friday, Greece will present new austerity and
privatization plans in an attempt to convince markets it can
tidy up its finances and avoid a restructuring.
Although its debt levels look unsustainable, opposition to
what would be the first debt restructuring in western Europe in
six decades is high, particularly at the European Central
The ECB holds an estimated 40-50 billion euros of Greek
debt itself and worries such a move would hammer euro zone
banks and set off a new round of contagion. Greek, German and
French banks have the biggest exposure to Greek sovereign
"According to our analysis, a debt restructuring would
result in the failure of a large part of Greece's banking
system," ECB Executive Board member Lorenzo Bini Smaghi told
Italian business daily Il Sole 24 Ore.
"The Greek economy would be on its knees, with devastating
effects on social cohesion and the maintenance of democracy in
that country," he said.
European Economic and Monetary Affairs Commissioner Olli
Rehn, in Washington for spring meetings of the IMF and World
Bank, said debt restructuring was not an option. [ID:nWEA4727]
"Nobody should underestimate the risk of a contagion effect
on other sovereigns," he said.
The IMF's first deputy managing director, John Lipsky, also
played down the need for restructuring, but acknowledged in a
Reuters Insider interview that "adjustments and mid-course
corrections" in Greece's bailout programme may be required.
Greece epitomises the troubles facing Europe's most
indebted economies as they struggle with budget cuts which
undermine their ability to grow and service their debt.
"The severe economic recession and the lack of improvement
in tax revenues suggest Greece may already be in the vicious
spiral of too tight fiscal policy and too weak economic
performance, where a write-off of part of the debt would be the
only possible way out," said Giada Giani, an economist at
Citibank, in a report.
European officials are hoping an 80 billion euro bailout
for Portugal, expected to be sealed by mid-May, will be the
last. Debt markets have broadly shown that Spain and Italy are
succeeding in keeping investors' faith.
The Bank of Spain approved the capital raising plans of 13
banks on Thursday, saying nine may need state funds to bring
their capital ratios up to new minimum levels.
Spain's unlisted savings banks, known as "cajas," are
undergoing a massive state-driven restructuring to reassure
markets about the stability of the Spanish banking system.
In Portugal, the leader of the largest labor union told
Reuters he was considering calling a general strike to step up
protests against austerity measures that are expected to deepen
under the looming EU/IMF bailout. [ID:nLIS002644]
European Commission and IMF officials started poring over
Portugal's public accounts this week, and market nervousness
could rise ahead of the weekend when a Finnish parliamentary
election looks set to boost the influence of euro-sceptic
parties opposed to a bailout for Lisbon. [ID:nLDE73D08L]
In contrast to the struggling economies on Europe's
southern periphery, bloc heavyweight Germany raised its GDP
forecasts on Thursday, predicting growth of 2.6 percent this
year versus 2.3 percent previously. [ID:nLDE73D1EA]
Senior ECB policymakers also stepped up warnings about
rising inflation, in a sign the central bank could embark on a
steady run of rate hikes after tightening monetary policy last
week for the first time in nearly three years. [ID:nLDE73D1EW]
(Additional reporting by Shrikesh Laxmidas, Sergio Goncalves
and Andrei Khalip in Lisbon, Andreas Rinke in Berlin; Writing
by Noah Barkin; Editing by Ruth Pitchford and Leslie Adler)