Clinching a Lasting Greek Deal?
The Greek government and financial markets were cheered on Tuesday by an agreement between euro zone finance ministers and the International Monetary Fund to reduce Greece's debt, paving the way for the release of urgently needed aid loans.Some thoughts on this latest Greek deal. First, I told my readers a long time ago to start looking beyond Grexit. There was no way in hell they would let Greece leave the eurozone, not because they love Greece, but because they're terrified of the domino effect that action would have on Spain, Italy and Portugal.
The deal, clinched at the third attempt after weeks of wrangling, removes the biggest risk of a sovereign default in the euro zone for now, ensuring the near-bankrupt country will stay afloat at least until after a 2013 German general election.
"Tomorrow, a new day starts for all Greeks," Prime Minister Antonis Samaras told reporters at 3 a.m. in Athens after staying up to follow the tense Brussels negotiations.
After 12 hours of talks, international lenders agreed on a package of measures to reduce Greek debt by more than 40 billion euros, projected to cut it to 124 percent of gross domestic product by 2020.
In an additional new promise, ministers committed to taking further steps to lower Greece's debt to "significantly below 110 percent" in 2022.
That was a veiled acknowledgement that some write-off of loans may be necessary in 2016, the point when Greece is forecast to reach a primary budget surplus, although Germany and its northern allies continue to reject such a step publicly.
Analyst Alex White of JP Morgan called it "another moment of ‘creative ambiguity' to match the June (EU) Summit deal on legacy bank assets; i.e. a statement from which all sides can take a degree of comfort".
The euro strengthened, European shares climbed to near a three-week high and safe haven German bonds fell on Tuesday, after the agreement to reduce Greek debt and release loans to keep the economy afloat.
"The political will to reward the Greek austerity and reform measures has already been there for a while. Now, this political will has finally been supplemented by financial support," economist Carsten Brzeski of ING said.
PARLIAMENTARY APPROVAL
To reduce the debt pile, ministers agreed to cut the interest rate on official loans, extend the maturity of Greece's loans from the EFSF bailout fund by 15 years to 30 years, and grant a 10-year interest repayment deferral on those loans.
German Finance Minister Wolfgang Schaeuble said Athens had to come close to achieving a primary surplus, where state income covers its expenditure, excluding the huge debt repayments.
"When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," Schaeuble said.
Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment needed to recapitalize Greece's teetering banks and enable the government to pay wages, pensions and suppliers on December 13 - after those national parliaments that need to approve the package do so.
The German and Dutch lower houses of parliament and the Grand Committee of the Finnish parliament have to endorse the deal. Losing no time, Schaeuble said he had asked German lawmakers to vote on the package this week.
Greece will receive 43.7 billion euros in four installments once it fulfills all conditions. The 34.4 billion euro December payment will comprise 23.8 billion for banks and 10.6 billion in budget assistance.
The IMF's share, less than a third of the total, will be paid out only once a buy-back of Greek debt has occurred in the coming weeks, but IMF Managing Director Christine Lagarde said the Fund had no intention of pulling out of the program.
Austrian Chancellor Werner Faymann welcomed the deal but said Greece still had a long way to go to get its finances and economy into shape. Vice Chancellor Michael Spindelegger told reporters the important thing had been keeping the IMF on board.
"It had threatened to go in a direction that the IMF would exit Greek financing. This was averted and this is decisive for us Europeans," he said.
The debt buy-back was the part of the package on which the least detail was disclosed, to try to avoid giving hedge funds an opportunity to push up prices. Officials have previously talked of a 10 billion euro program to buy debt back from private investors at about 35 cents in the euro.
The ministers promised to hand back 11 billion euros in profits accruing to their national central banks from European Central Bank purchases of discounted Greek government bonds in the secondary market.
BETTER FUTURE
The deal substantially reduces the risk of a Greek exit from the single currency area, unless political turmoil were to bring down Samaras's pro-bailout coalition and pass power to radical leftists or rightists.
The biggest opposition party, the hard left SYRIZA, which now leads Samaras's center-right New Democracy in opinion polls, dismissed the deal and said it fell short of what was needed to make Greece's debt affordable.
Greece, where the euro zone's debt crisis erupted in late 2009, is proportionately the currency area's most heavily indebted country, despite a big cut this year in the value of privately-held debt. Its economy has shrunk by nearly 25 percent in five years.
Negotiations had been stalled over how Greece's debt, forecast to peak at 190-200 percent of GDP in the coming two years, could be cut to a more bearable 120 percent by 2020.
The agreed figure fell slightly short of that goal, and the IMF insisted that euro zone ministers should make a firm commitment to further steps to reduce the debt if Athens faithfully implements its budget and reform program.
The main question remains whether Greek debt can become affordable without euro zone governments having to write off some of the loans they have made to Athens.
Germany and its northern European allies have hitherto rejected any idea of forgiving official loans to Athens, but European Union officials believe that line may soften after next September's German general election.
Schaeuble told reporters that it was legally impossible for Germany and other countries to forgive debt while simultaneously giving new loan guarantees. That did not explicitly preclude debt relief at a later stage, once Greece completes its adjustment program and no longer needs new loans.
But senior conservative German lawmaker Gerda Hasselfeldt said there was no legal possibility for a debt "haircut" for Greece in the future either.
At Germany's insistence, earmarked revenue and aid payments will go into a strengthened "segregated account" to ensure that Greece services its debts.
A source familiar with IMF thinking said a loan write-off once Greece has fulfilled its program would be the simplest way to make its debt viable, but other methods such as forgoing interest payments, or lending at below market rates and extending maturities could all help.
German central bank governor Jens Weidmann has suggested that Greece could "earn" a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view.
The ministers agreed to reduce interest on already extended bilateral loans in stages from the current 150 basis points above financing costs to 50 bps.
Second, while this deal ensures wages and pensions will continue being paid in Greece, it also ensures German and French banks won't take bigger losses and continue collecting interest on their debt. A friend of mine remarked yesterday that the IMF wanted more write-offs because in Europe, these deals are almost entirely being financed by the public sector. "The IMF knows this isn't sustainable."
Third, as I recently noted in the end of European solidarity, Greece will never get its debt under control until it reforms its bloated public sector, cuts bureaucratic red tape and corruption, and implements meaningful investment policies to start growing again. Without growth, they will never escape their debt quagmire.
Fourth, mark my words, there will be another "Greek haircut" in the future but only after Frau Merkel gets reelected. This deal buys her time to focus on getting reelected but once she gets in, I suspect you will see a much more receptive Merkel.
Finally, for all you vulture funds looking to score big on Greek and periphery Europe's sovereign debt woes, have a look at what's going on in Argentina where they just appealed a US hedge fund ruling:
Argentina has appealed against a US court order forcing it to pay $1.3bn (£810m) to hedge funds holding debts from the country's 2001 default.I wish Elliott Capital Management and Aurelius Capital Management good luck collecting these monies. In my opinion, they were fools for not signing up to the writedown of Argentina's debt. They can seize all the Argentine vessels they want, it won't make a difference. They will be taught a lesson and so will other vulture funds looking to make a killing off of sovereign debt restructurings (again, my opinion).
The economy minister in Buenos Aires said the US ruling was an "attack on sovereignty" as it filed an appeal in New York on Monday.
Last week, US district judge Thomas Griesa ordered Argentina to pay out $1.3bn to the tiny minority of bondholders who refused to sign up to a hard-fought writedown of its debts after the country's sovereign debt default a decade ago.
About 93% of bondholders agreed to a restructuring that gave them back about 30p in the pound, but some hedge fund creditors refused the deal and are pursing Argentina through courts across the world. Argentina has refused to pay the hedge funds, which it describes as "vultures".
The economic ministry said Griesa's ruling "shows ignorance of the laws passed by our Congress".
Earlier on Monday, investors holding $1bn-worth of restructured Argentine debt filed an emergency motion in a US court to also fight the ruling, which they fear could prevent payment on their bonds and lead to a fresh default.
They are concerned that if Argentina is forced to pay the so-called vulture funds it will reduce the amount of money the country has available to its other lenders, pushing it into a technical default on its existing $60bn of debts.
In his ruling last week, Griesa said: "Argentina owes this and owes it now."
"In accepting the exchange offers of 30 cents on the dollar, the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating," he said. "Moreover, it is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After 10 years of litigation this is a just result."
The judge made his ruling following claims led by Elliott Capital Management and Aurelius Capital Management.
Below, Bloomberg reports that European finance ministers eased the terms on emergency aid for Greece, declaring after three years of false starts that Europe has found the formula for nursing the debt-stricken country back to health.
David Tweed, Bloomberg European Editor, also examines the agreement by E.U. finance ministers to cut rates on Greek bailout loans. He speaks on Bloomberg Television's "In The Loop."
Finally, Nick Beecroft, chairman of Saxo Capital Markets U.K. Ltd., talks about the terms on emergency aid for Greece. He speaks with Mark Barton on Bloomberg Television's "Countdown."