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Archive for June 4th, 2011

It’s funny. The media is chock-full of “peace for our time” agreement between Greece and its bailout creditors, but the view on here is that agreement is still a long way off. All Greece did this week was agree to a privatisation and austerity plan which, if executed, has a good chance of leading that country back to fiscal sustainability over the medium term. And agreement was between Greece and the juniors, the staff in the review missions on the ground in Athens. What happens next is the staff report from the troika will be published in a week, and then the senior decision makers in the creditor institutions will mull over proposals. Already German finance minister Wolfgang Schauble is advising caution.  Here’s what the troika has to say in a joint press release yesterday about Greece. Here’s what’s missing

(1) How is Greece  going to repay bondholders whose loans are maturing over the coming months? The previous plan was that Greece would be able to go to the market itself and issue new bonds but that is not possible when short term interest rates are 25% and your 10-year bond is over 15%. There is no word on how this debt of elephantine proportions is going to be repaid on maturity. There are various panicked suggestions that private bondholders might accept new bonds with higher interest rates or collateral or there might be a second bailout worth €60bn. Actually €60bn could be a considerable under-estimate, there is a worthwhile article here setting out Greece’s immediate funding requirements which concludes that it may need considerably more than €60bn just for the next two years. There is no mention of this at all in yesterday’s joint statement.

(2) The Greek prime minister and his immediate team might have offered proposals to the troika of the IMF, European Commission and the ECB, and those proposals might be considered broadly acceptable. But how will the Greek prime minister and his immediate team convince the Greek nation to sell off €50bn of assets owned by the nation? If the Greeks are upset that the British Museum is still holding on to the Elgin Marbles, how will they feel about foreign ownership of its transport, utility and banking sectors? Putting national pride aside, there is the more immediate threat of massive redundancies at inefficient state-run institutions which new buyers will undoubtedly want to reform. Unionists are already staging strikes and sit-ins in protest at what are still vague proposals. And accompanying reform will be pressure from the new buyers to jack up prices so everything from train tickets to water rates to bank charges will all be subjected to private sector commercial rigour, and for average Greeks, that will mean higher prices. The troika seem placated for the moment with the commitment to set up a privatisation agency and with plans on paper to effect the great sell-off. But as the saying goes “there’s many a slip betwixt cup and lip”

And this is before the savage austerity measures which are to be unveiled in full next week and then subjected to debate in parliament and on the streets. Remember the prime minister’s party, PASOK holds 160 seats in the 300-seat parliament but (a) there is growing unease in PASOK about the new austerity measures and (b) the latest opinion polls place the Opposition ahead of PASOK, so although a general election is not due for two years, the government will face intense attack which may ring its own death knell, not something any politician wants. Daily demonstrations continue outside the Greek parliament (recent photographs here)

Elsewhere yesterday, the Greek prime minister was meeting with the leader of the EuroZone finance ministers, and they emerged from the meeting the best of buddies. The fifth tranche of the bailout, worth €12bn, would “most likely” be released in early July, a slippage from the 29th June. But the statement that “conditionality will include private sector involvement on a voluntary basis” should have set alarm bells ringing. With Moody’s indicating the probability of a sovereign default in Greece in the next five years at 50%, bondholders with maturing debt now might want to take advantage of the uncoordinated and panicked responses of the EU in particular to exit their exposure to Greek bonds at maximum prices. Last night ratings agency Standard and Poor’s warned that the mooted re-profiling would be considered a default.

As to the way forward, it seems that there is to be (yet another) summit of EuroZone finance ministers on 23rd June to agree the way forward. You can expect the second bailout terms by then. There are suggestions that privatization proceeds may be pledged against a new bailout but as reported by Greek newspaper, Capital, there may be issues with any new bailout from Germany and Holland which might require parliamentary approval in an already hostile environment.

The expectation here is that over the weekend, the smiley agreement at staff level yesterday will unravel as Greeks confront the reality of the promises and as creditors confront the specifics of what is required of them with a second bailout and dealing with yet more Greek promises.

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