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Greece’s second rescue package is now proceeding apace. After a meeting in Berlin, the leaders of Europe’s two most viable economies, Germany’s Angela Merkel and France’s Nicolas Sarkozy, have resolved one of the principal disputes surrounding the new bailout: private bondholders will not be forced to participate, but may do so on a voluntary basis. This action follows Greek Prime Minister George Papandreou’s cabinet shake-up last Friday, which resulted in the replacement of his finance minister with a Socialist Party colleague capable of delivering the votes necessary to pass the latest austerity package, even as rank-and-file Greeks despise the latest combination of higher taxes, budget cuts and the sale of government-owned assets.
“The country must be saved and will be saved,” said new Greek Finance Minister Evangelos Venizelos, whose own track record of financial acumen is questionable. From 2001-2004, he was in charge of getting Athens ready for the Olympic Games, and the $15 billion spent did less than expected to modernize Greece’s post-game infrastructure. Yet it is likely that Mr. Venizelos’s financial qualifications are a side issue. As a loyal member of the same Pan-Hellenic Socialist Movement (Pasok) party as Prime Minister Papandreou, as well as being Papandreou’s chief rival during the 2004 general election, Mr. Venizelos’s support of the latest package is critical within a party where the defection of only six members could derail approval of the additional funding and/or the current government itself.
According to Jose Vinals, director of the monetary and capital markets department of the International Monetary Fund (IMF), any action taken by Greece as well as other countries mired in government debt (including the United States), must occur sooner, rather than later. “You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire,” said Vinals. “We have now entered very clearly into a new phase which is, I would say, the political phase of the crisis.”
Thus, Germany and France have come together, despite Germany’s original insistence that the banks and other private creditors holding Greek debt incur losses as part of the new rescue plan. This was a natural reaction by Merkel to the German public’s well-publicized disdain for underwriting Greek profligacy. Merkel herself expressed that disdain to German national news agency DPA on May 18th. “It’s not about whether people in Greece, Spain, Portugal can’t retire earlier than in Germany, it’s about everyone pulling their weight equally. We can’t have one currency, and one gets a lot of vacation and the other very little.”
The French, on the other hand, are ostensibly more pragmatic. “France is a Latin country that feels closer to the Greeks,” said Philippe Moreau-Defarge, researcher at the French Institute of International Relations. “They also feel it could happen to them,” he added. A survey by the Greek newspaper Ethnos taken in March last year, bears this out: 69.6 percent of French respondents are willing to help Greece, while only 2.7 percent of Germans feel the same way.
Yet such pragmatism may be buttressed by the sobering reality that no other developed country has incurred greater risk with respect to a Greek default than France. French bank exposure is $56.7 billion, versus $33.97 billion for German banks, and last Wednesday, Moody’s Investment Service warned that the country’s three largest banks, BNP Paribas SA, Société Générale SA, and Crédit Agricole SA, may be facing a ratings downgrade. This follows Standard & Poor’s lowering of Greece’s credit rating to CCC, as there is ”a significantly higher likelihood of one or more defaults,” the agency said in a statement released on June 13th.
A briefing paper circulated by the European Commission reviewed by the Financial Times proposed three options for dealing with Greek debt. One would have been a voluntary debt exchange, which would extend the maturity date on Greek government bonds, giving Athens more time to repair its debt crisis. German finance minister Wolfgang Schäuble suggested a seven-year extension, which was completely rejected by the European Central Bank (ECB) and France, due to the fact that such a move would likely be considered a “structural default.” Andrew Bosomworth, head of Munich portfolio management at Pimco explained. “An extension of the maturities will not solve Greece’s income and debt imbalances. It will leave the country’s debt stock unchanged and thus the reluctance of the market to buy into the IMF/EU debt program will not change,” he said.
Options two and three involved a voluntary rollover of current bonds, which was seen as less likely to trigger a ratings downgrade. The first rollover would be a coordinated one, likely organized by the Greek government, and designed to encourage the greatest level of private participation, while the second would be an informal rollover, which would likely keep most private investors on the sidelines.
Thus, France and Germany have agreed to make any private participation voluntary without a clear indication of whether option two or option three is the preferred choice. This was reflected in the reality that even this latest package, characterized as a “breakthrough” by Mr. Sarkozy, must still be approved by the ECB and win the favor of private creditors, a process likely to take several weeks. And the lack of clarity remains troubling. “Under certain conditions, a rollover could be viewed as not truly voluntary by the rating agencies and therefore subject to selective default,” wrote Gavan Nolan, director of credit research at Markit. “Getting the balance right between enticing participation at a cost that is reasonable will be difficult,” he added.
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