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Greek report Greek report
by Euro Reporter
2012-01-17 12:23:17
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Watch the Greeks, not the agencies

While the big headlines over the weekend were about S&P's downgrades of European countries, the more worrying news came from Greece, where talks on a debt deal broke up. While I am not as negative as some on the agencies (their record on rating sovereign debt is pretty good), the market had already anticipated a downgrade of France, which has been paying a higher rate on its debt than Germany. Greece's debt is a complex issue. Clearly, it must default to get its debt-to-GDP ratio down. But it also has a competitiveness problem that requires either devaluation (not possible within the euro) or a fall in its costs (lower wages and thus a lower standard of living). Some of the pain of the latter option can be cushioned by subsidies from its fellow EU nations but they demand reforms in return. Many of those reforms are opposed by Greeks; it remains to be seen whether the technocratic government can push them though.

Of course, Greece has already had loans from the rest of the EU and this complicates matters further. The authorities are unwilling to see take any write-downs on their money. That puts all the burden on the private sector. Indeed, the more money lent by official bodies, the greater the write-down the private sector is forced to absorb if the Greek debt-to-GDP ratio is to fall significantly. Throw in another twist. The authorities are obsessed (rather perversely in my view) with making the agreement voluntary so that the Greek deal is not classed as a default in terms of credit default swap market. That gives the creditors a bit more bargaining power. The banks appear likely to go along with whatever they're offered but the hedge funds are putting up more of a stink.

Talks between Greece and its private sector creditors are due to resume on Wednesday, January 18. Whereas a tentative deal was reached in October to write the debt down by 50%, a lot depends on the interest rate on the new debt. The lower the rate, the better for Greece but the bigger the hit (in present value terms) to the creditors. And then there are the knock-on effects. The EU has said that the Greek deal won't set a precedent for other nations. But, pull the other one. The EU has said a lot of stuff during this crisis and has backtracked many times. The bigger the write-off for Greece and the more aid (in terms of cheap finance), the more other nations will be encouraged to default and the greater the worries of creditors of other nations. That's why the Greek deal (or lack of it) is so crucial.

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Greece confident it can solve bailout impasse ahead of debt inspectors’ return to Athens


Greece is gearing up for another tough week of negotiations on the country’s crucial second bailout as it tries to revive talks with private investors and has its economy scrutinized by a team of international debt inspectors. “This is a critical time for the Greek economy ... the negotiations are very difficult,” government spokesman Pantelis Kapsis said Monday. “It is understood that there will be renewed pressure (from the debt inspectors) to speed up structural reforms.” The mission heads of inspectors from the so-called “troika” — the International Monetary Fund, European Central Bank and European Commission — are expected to arrive in Athens on Friday, the Finance Ministry said. The technical teams, meanwhile, will begin work in Athens Tuesday, the same time Horst Reichenbach, the European Commission’s task force chief for Greece, is also due for a four-day visit.

Two top Greek negotiators, public debt management agency head Petros Christodoulou and chief economic adviser George Zanias, were heading to Washington Monday to attend the IMF board meeting on Wednesday, which would be dealing with Greece, the Finance Ministry said. An integral part of the €130 billion ($166 billion) second bailout is a bond swap deal with private creditors that is crucial to avoid a devastating default. But those talks appeared close to collapse Friday amid disagreements over the interest rates of the new bonds. The negotiations are expected to resume this week, probably Wednesday. Known as the Private Sector Involvement, or PSI, the talks aim to reduce Greece’s debt by €100 billion ($127.8 billion) by swapping private creditors’ bonds with new ones with a 50 percent lower face value. Without it, the country could suffer a catastrophic bankruptcy that would send shock waves through the global economy. “Despite the difficulties, there is optimism for the outcome” of the second bailout deal, Kapsis said.

Charles Dallara and Jean Lemierre of the Institute of International Finance, a global body representing the private bondholders, met in Athens last week with Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos, but the talks were suspended on Friday, with the IIF saying that despite Greek efforts, there had not been “a constructive consolidated response by all parties.” People familiar with the talks said that while a deal appeared close last Thursday, a problem arose Thursday night over the interest rate the new bonds would have, with the International Monetary Fund and Germany seeking a coupon rate below 3 percent — a very low rate for bonds that are paid off in 20 to 30 years’ time.

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Greece default fears grow


Greece sent senior officials to Washington on Monday for meetings with the International Monetary Fund (IMF) as it raced against the clock to break a deadlock in debt swap talks that has prompted new fears of an unruly default. Barely a month after an injection of bailout funds helped avert bankruptcy, Greece is back at the centre of the eurozone crisis as fears of a default and a subsequent eurozone exit overshadow a mass credit downgrade of eurozone countries. Athens needs a deal with the private sector within days to avoid going bankrupt when €14.5bn of bond redemptions fall due in late March. But talks with its creditor banks broke down without an agreement on Friday. Greece put a brave face on the standoff.

"There is a little pause in these discussions. But I am confident that they will continue and we will reach an agreement that is mutually acceptable in time," Greek Prime Minister Lucas Papademos told CNBC television. He said talks on both the debt swap and the latest bailout must be completed over the next two to three weeks. "This is the objective. I think the conditions are in place in order to do so," Papademos told the broadcaster. A deal with the banks must be sealed before senior inspectors from the European Union, IMF and European Central Bank (ECB) "troika" arrive in Athens next week to finalise a second, €130bn bailout.

The banks say Athens is not the problem in the talks, suggesting the issue lies with terms insisted on by foreign lenders keeping Greece afloat with aid. In a bid to resolve the impasse, a government source said the head of Greece's debt agency and a senior adviser were travelling on Monday to Washington to meet IMF officials - just a day before a team of technical experts from the troika arrives in the Greek capital. Under the bailout terms agreed in October, Greek privately-held debt would be reduced by half so that, together with structural reforms, the overall debt to gross domestic product ratio of Greece would fall to 120% in 2020 from 160% now.


        
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