Sunday, February 5, 2012

Time Running Out For Greece?

Congratulations Giants, that was an excellent Super Bowl. Still can't get over that catch! But now my attention is quickly shifting over to Greece where Prime Minister Lucas Papademos announced on Sunday night that agreement had been reached on certain “basic issues” but the talks will spill over to Monday to finalize a deal:

After a five-hour meeting with the leaders of the three parties in his fragile coalition government, Prime Minister Lucas Papademos announced on Sunday night that agreement had been reached on certain “basic issues” -- though the heads of the two smaller parties indicated that they remained opposed to excessive austerity -- and that fresh talks would be held Monday to finalize the details of a second bailout package for Greece.

A written statement issued after the meeting by the premier’s office said that Papademos and the party leaders had agreed to implement measures within 2012 to curb public spending by 1.5 percent of gross domestic product, to secure the viability of auxiliary pensions, to tackle a competitiveness deficit by taking measures which include the reduction of ”wage costs and non-wage costs,” and to recapitalize banks “using a combination of methods that secure the promotion of public interest with the banks’ corporate independence.” The statement, which omitted key details about controversial issues such as proposed cuts to wages in the private sector, concluded that the premier and party leaders would meet again Monday “to finish discussions on the content of the program.”

Earlier, comments by conservative New Democracy leader Antonis Samaras suggested that major sticking points remained. “They are asking for more recession than the country can take,’’ he said, referring to the country’s foreign creditors. “I am fighting against this.’’

The leader of the right-wing Popular Orthodox Rally (LAOS), Giorgos Karatzaferis, also struck an indignant tone, telling reporters that he “will not contribute to the explosion of a revolution due to a wretchedness that will then spread across Europe.’’

In a letter to Papademos, Socialist PASOK party leader and former Premier George Papandreou reiterated his position on the recapitalization of Greek banks, insisting that the new state shares should include voting rights. He also called for the extension of Papademos’s mandate through October 2013 to allow for the implementation of all decisions.

Meanwhile, in central Athens, a few hundred self-styled anarchists and members of left-wing organizations who had gathered in central Syntagma Square Sunday evening for an anti-austerity protest were involved in minor scuffles with police who tried to disperse them. There were no reports of injuries however.

In comments made late on Saturday after talks with foreign envoys, who also met with Papademos earlier Sunday, Finance Minister Evangelos Venizelos gave an indication of just how tough the negotiations had been. “The gap between the successful completion of procedures and a deadlock, which could be accidental or due to a misunderstanding, is very small. We are on the razor’s edge,” he said.

Speaking after a teleconference call with his eurozone peers, Venizelos said the conversation had been “difficult” and that there had been “great concern and great pressure” from creditor states.

Indeed, creditors are fed up with Greeks, stepping up the pressure for austerity:

The pressure from creditor states for Greece to back austerity measures mounted over the weekend, with Jean-Claude Juncker, chairman of Eurogroup of eurozone finance ministers, using some of his harshest language yet, saying that a Greek default could not be ruled out if a deal on the terms of a second bailout is not reached.

“If we should determine that everything is going wrong in Greece, then there would not be a new program, then that would mean that in March a declaration of bankruptcy would occur,” Juncker told German news magazine Der Spiegel. The possibility of bankruptcy should spur Greek politicians into implementing reforms, he added.

In Germany meanwhile, patience with Greece was clearly running out. According to the results of a poll published in mass-selling newspaper Bild am Sonntag, the majority of Germans feel the euro bloc would be better off without debt-wracked Greece. More than half (53 percent) of Germans polled said they thought it would be better for the euro if Greece returned to the drachma. Only 34 percent opposed a Greek eurozone exit. An overwhelming 80 percent said they were against releasing additional rescue funding if measures are not implemented by Greece.

Meanwhile, Jorgos Chatzimarkakis, a German MEP of Greek descent, told Bild that Greece is in need of a new image. Chatzimarkakis proposed that Greece change its name to Hellas and rewrite its constitution as a way of starting afresh. “For many in Europe, the name ‘Greece’ stands for a broken political system, nepotism,” he said, calling for a new political system.

The MEP also argued that the funding Europe is pumping into Greece is going to debt repayment but not tackling the country’s problems. “Greece needs economic growth,” he said. In comments over the weekend Peter Altmaier, the chief whip for German Chancellor Angela Merkel’s Christian Democrats, expressed a different view. The concept of buying growth with government money was adopted in the 2008 and fueled the global debt crisis, Tagesspiegel quoted Altmaier as saying. Such a stimulus plan is no longer feasible as there is no money left to spend, Altmaier is reported to have said.

I don't blame Germans. I'm also fed up of Greek politicians looking to secure loans without implementing reforms and only thinking about how they can win the next elections. I would throw all these leaders in jail for treason. They're a national disgrace.

With time running out, Greece better deliver on reforms or risk sending the country back to the Dark Ages. The party is over, creditors are fed up and so are many Greeks within and outside Greece watching these political leaders trying to score political points. It's time to face the music and accept that Greece is in no position to keep delaying implementing reforms.

Finally, Dimitris Kontogiannis of ekathimerini argues that no matter what happens, official creditors will sooner or later have to proceed with a fresh haircut for Greece:

The likely agreement between Greece and the troika on the terms of the new economic program and the level of private sector involvement (PSI) will significantly raise the cost of a Greek exit from the euro. However, it is likely not to be enough for Greece to avoid another major public debt restructuring down the road.

When this article was being written it was not clear whether Prime Minister Lucas Papademos and the three political leaders would reach an agreement with the representatives of the European Commission, the International Monetary Fund and the European Central Bank -- collectively known as the troika -- on the second economic program.

We have always assumed, however, that the stakes are too high for both sides to fail to reach a fair compromise, and therefore we will proceed on the assumption that there will be an agreement on the terms of the second bailout package and the PSI plan will be implemented.

In this light, we argue that the agreement acts as a barrier against a potential Greek exit from the eurozone because it shifts to a large extent the cost from the private sector to eurozone countries. Therefore, it should put to rest for quite some time talk of Greece’s euro exit in official circles, which was not the case before former Premier George Papandreou came up with the idea of a referendum on the agreement reached at the European Union summit last October.

It is noted that Greek government bonds in private hands accounted for more than 90 percent of total public debt in 2009. At the end of 2011, the percentage is estimated to have fallen to about 56-57 percent as official loans by eurozone countries and the IMF replaced expiring bonds and the ECB amassed some 40 to 60 billion euros of Greek bonds.

Assuming the PSI plan is implemented and participation in it is very high (exceeding 92 percent), the share of Greek bonds in the country’s total public debt is estimated to fall further to below 24 percent. Greek entities such as banks, pension funds and others will end up holding between 6 and 8 percent, with non-residents accounting for less than 16 percent. In other words, the official sector will become the biggest holder of Greek debt.

Readers are reminded that the second bailout package calls for 130 billion euros -- which may be revised higher -- in new loans, of which 89 billion euros should be disbursed in the first quarter of this year. This is in addition to the first financial package equal to 110 billion euros from the EU and the IMF, of which more than 72 billion euros has been disbursed so far.

The cost of letting Greece go down is even bigger if one takes into account the eurozone’s exposure to the country via the ECB’s liquidity operations and emergency assistance, put at more than 100 billion euros.

Moreover, the ECB and eurozone national central banks, which comprise the Eurosystem, are exposed to Greece in another way. This is the case because many eurozone countries have not adopted legislation on sovereign immunity, including protection from pre-judgment attachment of foreign central bank assets, unlike in the US and the UK.

So, central bank assets would not be fully protected and instead would be exposed to litigation risk if Greece were allowed to default. This is an argument in favor of the ECB’s contribution to the reduction of the Greek public debt and a reminder of the legal issues which would arise should Greece and its official creditors not reach an agreement.

Even though the costs of a euro-area exit for Greece will rise significantly following an agreement and subsequently a high participation rate in the PSI, the chances of the country avoiding another major public debt restructuring down the road are real.

By all accounts, the troika is aiming at a Greek public debt to GDP ratio of 120 percent by 2020 to make it sustainable. The IMF appears to have called for additional debt reduction or/and official loans to attain this objective after revising its assumptions to take into account the worsening macroeconomic conditions and more realistic proceeds from privatizations.

Although the new calculations appear to be more pragmatic, we think there is a real risk of Greece falling deeper into the debt trap, despite the expected significant debt relief of some 100 billion euros from the PSI. This is so because the Greek economy appears to have entered a new low-growth phase which the new economic program may protract further by including more austerity measures in the form of higher taxes and few initiatives to boost economic growth.

According to Deputy Finance Minister Professor Yiannis Mourmouras, a member of the conservative New Democracy party, the country implemented austerity measures worth more than 43 billion euros in 2010-11 to have the budget deficit shrink by some 16 billion euros. In reality, the deficit reduction was smaller by some 1-2 billion euros due to one-off expenditures recorded in the budget of 2009, an election year.

All in all, the expected new agreement acts as a barrier against a Greek exit from the euro area but may not be enough to exclude another major restructuring of the Greek public debt down the road.

This time, though, it will involve the holders of Greek debt, namely the country’s official creditors and is likely to take the form of 30-year loan extensions a la Paris Club and Iceland.

Below, Gabriel Stein, a director at Lombard Street Research Ltd., discusses the Chinese economy and the prospect of Greece, Portugal and Italy leaving Europe's monetary union. He speaks with Linzie Janis, Owen Thomas and David Tweed on Bloomberg Television's "Countdown." I too am starting to believe that it's game over for Greece. Its leaders have fumbled the ball once too many times.

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