Greece Faces Crucial Week?

Ekathimerini reports, Greece faces crucial week:
There were encouraging words for Greece from Germany Sunday ahead of a challenging week of negotiations with representatives of the European Commission, the European Central Bank and the International Monetary Fund on a possible new bailout as well as banking representatives over a haircut for holders of Greek debt.

Following talks with Prime Minister Lucas Papademos in Athens, German Foreign Minister Guido Westerwelle expressed confidence that the negotiations with Greek bondholders, also known as PSI, would reach a positive conclusion despite no deal being reached last week.

“Discussions are difficult but with good faith they will reach a good result,” said Westerwelle, who also met his counterpart Stavros Dimas and New Democracy leader Antonis Samaras.

Earlier, German Chancellor Angela Merkel said spending cuts alone were not enough for Greece and that structural reforms were needed although they would take time to bear fruit.

She said there were many examples “where the IMF has arranged similar programs where, after a certain phase of recession, come very strong phases of growth.” “Progress has been made in Greece,” Merkel said, adding that tax collection was still a problem.

Germany’s backing comes as Greece enters a crucial week of talks. The technical team of the EC, ECB and IMF, or troika, is due to arrive in Athens on Monday. Top troika officials are expected to come later in the week but this will depend on the assessment of their colleagues.

A number of thorny issues remain open, including possible cuts to private sector wages and supplementary pensions. The government will also have to show how it will make up a shortfall of some 1.3 billion euros in revenues from 2011.

Talks with Charles Dallara, the head of the Institute of International Finance, a global banking body representing private bondholders, are expected to resume on Wednesday. Speaking to the Financial Times on Sunday, Dallara suggested that demands from outside Greece about the size of the haircut and the interest rate of the new bonds were hampering discussions.

“All the European heads of state said [at an October summit] they wanted a deal with a 50 per cent [haircut] and a voluntary agreement,” Dallara said. “Some of their own collaborators are not following that decision. Those who would expect private investors to take unreasonable losses on the coupon don’t understand the nature of a voluntary deal.”

There are some of us who think that private sector investors would be wise to get any deal they can get or else they'll be mired in an endless legal battle. And there is always the possibility that Greece will impose a collective action clauses but that leads to other complications (also read Andreas Koutras' latest on Greek CAC's Devil's Advocate).

Any way you slice it, this is a messy situation. It's not just Greece that faces a crucial week, Europe and the world face a crucial week if Greece and the bondholders do not find a suitable resolution. Moreover, the situation is critical. Ekathimerini reports that Greek banks must find 15 billion euros:

The countdown for the recapitalization of domestic banks has started after BlackRock Solutions on Friday reported additional funding needs of about 15 billion euros for local lenders.

The US company, commissioned by the Bank of Greece to assess the loan portfolio of Greek banks, delivered its much-awaited report yesterday and the conclusion is that the recession has had a considerable impact on the country’s credit system.

Bank sources believe that the dramatic downgrade of the country’s growth prospects by its foreign creditors for 2012 and 2013 led to a significant toughening in the criteria used by BlackRock.

“It would appear that the picture is worse than we had originally estimated,” an executive official of a Greek bank said.

The report’s conclusions and the implementation of a deal on a Greek debt haircut will determine the sum of the additional capital requirements for local lenders, with the horizon being seen as the end of 2013. Bank of Greece officials are already processing the report’s data, with the results expected to reach the banks by the end of February.

Then it is up to commercial banks to submit plans to the central bank for their capital strengthening in order to cover their needs. They will include ways to find funds and a description of their new business plan in terms of how they will adjust to the new financial environment. These plans will need to be submitted and approved by the Bank of Greece by the end of April. Bain & Company, one of the world’s top consultancy companies, will be assisting the Greek central bank in this process.

Banks are making plans for the sale of real estate properties, subsidiaries and even healthy loan portfolios in order to increase their capital base and avoiding sinking. They are also planning for the repurchase of hybrid capital at a considerable discount, which National Bank has already done, to improve their equity capital.

Already Eurobank EFG has decided to sell Polbank in Poland to Raiffeisen, while Piraeus Bank is looking for a buyer for its subsidiary in Egypt.

Private equity funds in Europe, North America and in the Middle East are going to be licking their chops trying to pick up some of these assets on the cheap.

But it won't be enough. Greece needs deep structural reforms and it needs to get serious on tax evasion and focus on growth. The same problems exist in Italy but unlike Greece, Italy is huge and it manufactures and exports goods.

I think Greece has tremendous potential. Not only does it have one of the most well educated populations (top science, math and engineering schools), many young Greeks speak several languages. If they get passed this week, it's high time Greece focuses on growth:

  • Cut the bureaucracy and offer older civil servants incentives to retire
  • Focus on stopping corruption at all levels
  • Focus on building alliances with Israel and Russia to explore natural gas in Cyprus and other parts
  • Complete major infrastructure projects
  • Build alliances with Spain, Italy, Germany and China to invest in more solar farms
  • And last but not least, take example from Malta and Ireland, and focus on making Greece the financial epicenter of Europe. If I was setting up a hedge fund, I would much rather set up base in Athens or my favorite, Crete, than London (yes, I am totally biased!)

On that last point, I remember visiting Vega Asset Management in Madrid. God I love that city and told Ravi and Jesus, the two founding partners, that they were smart setting up shop in Madrid. In this day and age, you can set up shop anywhere if you have the skill set, infrastructure and legal setup.

I am rambling on but my point is I see tremendous potential in Greece. It needs to build its relations with Israel and other countries, focusing on growth. Austerity has run its course. If your GDP keeps contracting by 5% or worse every year, then no matter what austerity measures you impose, your debt-to-GDP ratio will explode. It's a no-win situation.

Below, CNBC's Michelle Caruso-Cabrera sits down with Greek Prime Minister Lucas Papademos to discuss the country's ongoing negotiations with the private sector and Greece's place in the eurozone. Don't worry folks, if we get passed this week, it's smooth sailing for risk assets.