In the afternoon, central European time, the euro zone’s 17 finance ministers are to meet to iron out the last wrinkles of a €130-billion bailout package that will spare Greece from defaulting on its debt this time next month, when the treasury must redeem €14.5-billion in sovereign bonds. If Greece were to default, it would probably get the bum’s rush out of the euro zone and print drachmas in the hope of devaluing its way out of debilitating recession.
The background noise before the meeting started suggested the bailout was all but assured, though we have heard this before. Francois Baroin, Frances’s finance minister, assured that “the political commitments have been made” for the bailout, Greece’s second since the spring of 2010, when the European Union and the International Monetary Fund loaned Athens €110-billion.
Greek finance minister Evangelos Venizelos had a similar message ahead of the meeting. “We expect today the long period of uncertainty, which was in the interest of neither the Greek economy nor the euro zone as a whole, to end,” he told reporters. “The Greek people send to Europe the message that they have made, and will make, the necessary sacrifices for our country to regain its position of equality within the European family.”
If the finance ministers approve the bailout, two things will happen. The first is that the euro zone countries will have to approve higher guarantees for the European Financial Stability Facility (EFSF), the temporary bailout fund that will raise the rescue money.
The second – a bond-swap designed to crunch down Greece’s punishing national debt load – is more complicated and could still fall apart. The swap would see private investors (mostly banks) swap about €200-billion of clapped-out Greek bonds for new bonds worth about half as much. If it succeeds, Greece would shed about €100-billion of debt.
So far, the swap is “voluntary.” But that could change. If not enough investors sign up for the deal, Greece is threatening to push through legislation this week to force the holdouts to participate. The government would do so by adding a so-called collective action clause, or CAC, to the bond contract. If the CAC is triggered, the “voluntary” restructuring would become a “forced” restructuring, no doubt triggering downgrades by the credit ratings agencies.
Standard & Poor’s has already said it would slap a “CC” rating on the bonds if the CAC legislation is passed. Such a rating means “currently highly vulnerable,” that is, close to default.
March 8 is the last day that investors can sign up for the bond swap, according to Reuters.
The other question is whether the swap will put Greece on a sustainable financial footing. Many economists doubt it would, given the dire shape of the economy, which is about to enter is fifth year of deep recession as ever-deepening austerity measures destroy consumer and business confidence and send unemployment soaring.
The swap is designed to bring down Greece’s debt to gross domestic product ratio to 120 per cent by 2020, against the current crippling level of 160 per cent. But even 120 per cent is considered onerous for an economy that may show zero growth, or worse, for years. The level is about 50 per cent more than the euro zone average. Italy is struggling with a 120 per cent debt-to-GDP ratio even though its economy is considered much healthier and more diversified than Greece’s.
Some economists and European politicians have said Greece’s bailout would simply buy some time and that a third bailout, or a second debt restructuring, would be necessary barring a miraculous economic turnaround.
The European currency and stock markets traded up Monday, a sign that investors are optimistic that a Greek bailout will be approved.
Just before the finance minister’s meeting started, Luxembourg’s prime minister, Jean-Claude Juncker, who is chairman of the meeting, hinted that the markets were correct. “I am of the opinion that today we have to deliver, because we don’t have any more time,” he told reporters.
Based on past summits, the euro zone ministers may not reveal their decision until late in the night.
Original Article
Source: Globe
Author: Eric Reguly
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