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Greek Debt Crisis “An Absolute Nightmare,” FT’s Wolf Says

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

Days after S&P's downgrade sent yields of Greek debt soaring, European officials are reportedly working on another bailout package for the debt-laden nation.

The latest chapter in Europe's never-ending sovereign debt crisis comes about a year after Greece received a 110 billion euro ($158 billion) bailout package from the EU and IMF. That bailout was supposed to buy time for Greece to adopt austerity measures without having to tap the public debt markets. (See: Greece Is the Word: "I Think They'll Be Able to Control This," Dow Says)

But Greece has consistently fallen short of its budget targets in the past year and austerity measures have resulted in lower tax receipts and ever-higher deficits. As a result, financial markets are pricing in a default or major restructuring of Greek sovereign debt, putting renewed pressure on EU officials to prevent contagion into Europe's other 'PIIGS', most notably Spain.

The situation in Greece is an "absolute nightmare" for European officials, says Martin Wolf, The FT's chief economics correspondent.

Because it's "completely inconceivable" Greece will be able to raise enough money to fund its debts via the private market, Wolf says the country is faced with a stark choice: restructuring its debt now — and force private debt holders to take a haircut -- or become a ward of the EU, which will absorb the debt and then be desperate to avoid haircuts that would hit taxpayers (again).

From Wolf's point of view, the choice is an easy one: Restructure now and force the private sector to at least share in the pain (for a change).

"It's just not going to get better," he says of Greece's debt situation. "Essentially they have to bit the bullet. The difficultly is managing that while maintaining some financial system in Greece and avoiding massive contagion within the Eurozone."

Because Greece's debt problems are widely known and the potential for a restructuring well telegraphed, a 2008-style financial crisis "probably won't happen," Wolf says. "But the longer they wait, the worse [it] gets."

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com