Greece still haunting the Eurozone - The Best from Greece

Posted on: 30/Dec/2011

The Private Sector Involvement (PSI) in alleviating the Greek sovereign debt seems to be faltering. The two negotiating sides, Greece's official creditors, the EU and the IMF, and the International Institute of Finance (IIF) representing the private creditor banks, are obviously miles apart from each other.

Faltering PSI

The initial plan conceived in the EU Summit of 26 October provided for a haircut of the privately (aka banks) held Greek debt by 50%. Now, however, those bankers say that the proposed swap of their old bonds for new ones plus a 35% cash, will drive their net wealth down by 65% and not by 50%, as initially proposed.

Another point of friction is the interest rate of the new bonds. Greece, the EU and the IMF propose a 4,5-5% interest rate while the banks asking for 7% to 8% in order to accept a 65% cut on their nominal bond wealth. If however Greece accepts an interest rate above 4.5% to 5% the country's overall sovereign debt will not be cut down to 120% of the GNP by the year 2020, as the IMF demands.

The International Monetary Fund cannot continue financing a country which will not be solvent in the long term, and the Fund considers that a debt above the 120% of the GNP benchmark is not sustainable, so the IMF, under those terms, cannot continue participating in the troika with EU and the ECB in supporting Athens. On top of this, if Greece, the EU and the IMF accept an interest rate on the new Greek bonds to be handed out to the private lenders above 5%, the loan package of €130 billion in favour of Athens for the next three years agreed also on 23 October, is not enough.

At this point it must be remembered that the official lenders of Greece, that is the EU and the IMF, agreed on 26 October in Brussels to put together a new state to state loan package for Greece of up to €130 billion. Now, however, this sum looks insufficient to cater for Greece's financial needs over the next three years and has to be upgraded to at least €140 billion. The problem is though that the package of €130 billion was approved by the 17 Eurozone parliaments. including the Bundestag, and any change of this amount has to be also approved by the lawmakers.

Greece's deficits

Of course, all those problems are in a way theoretical, because the initial agreement of 26 October for a haircut in Greece's debts and a new loan package were made dependant on Athens' ability to cut down its state budget deficits to 7.5% of the GNP for this year, down from 10.5% in 2010. Unfortunately the austerity measures introduced by the Greek government over the past two years, in compliance with the demands of the troika of EU, ECB and the IMF have sent the country's economy to an unprecedented recession, which is about to claim anything around 6,5% off the GNP this year. As a result the 2011 fiscal deficit is predicted to probably exceed 9% of the GNP.

Even worse the political environment in Greece has more or less disintegrated after two years of austerity, without giving the country any tangible results or a visible opening in the horizon, and now the psychology of the population and the state machinery are in limbo.

The new government sworn in one month ago under PM Loukas Papademos, a former ECB vice governor, backed by the three largest political parties proved impotent to reverse the paralytic state in the state machine and the laws voted in Parliament are only partially applied, with the three parties minding only about their performance in the next election planned to be held any time after March.

As for the private sector of the economy the name of the game is more personnel layoffs. Fortunately there are good signs on the export front, with the foreign trade deficit being reduced by 30% every six months due to less imports and more exports. This is the only positive indication that the measures applied so far, could lead the economy to a sustainable state after some years.

In any case what is happening in Athens is still setting the pace not only for the Eurozone, but for the entire world markets. Interest rates for Spanish and Italian debt sky-rocketed and would have stayed there, if it was not for the ECB to have supplied almost half a trillion euro in soft loans to more that 500 Eurozone banks for an extraordinary maturity of three years.

The overall solution to the Eurozone's sovereign debt crisis is now hinging on the ability of the EU to create a new and strong fiscal union within the union, leaving out only Britain. But this is for the medium term. In the meantime however the EU has to come with convincing answers for the short term, and as it seems the ECB will be the main instrument in this.

source: http://www.neurope.eu

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