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BY COSTIS STAMBOLIS
Although the word “bailout” is not actually used by either EU or Greek government officials when commenting on the ongoing negotiations, there is little doubt among banking circles that this is what the latest agreement, which was sanctioned at a meeting of EU finance ministers in Madrid last Friday, is all about.
Earlier this month a near panic in the international bond markets and the sharp rise of Greek bond yields, led the Eurozone ministers to an emergency teleconference on April 11, to decide on an exceptional rescue package. Overall, the agreed assistance will consist of 30 bln euro 3-year fixed and variable-rate loans to be provided proportionally (to their participation at the ECB) by all eurozone countries and a 15 bln IMF facility.
According to the agreed terms of the EU financial aid the interest rate for the funds to be provided by the eurozone governments will be 3.5% above the benchmark euro rate, which works out at approximately 5%, but which is still below current market rates. Last week, two- and three-year Greek bonds were trading at 7.45%. Although the Greek government, through the finance minister George Papaconstantinou, has repeatedly stated that the country would not seek to draw on the EU and IMF money, banks and traders remain skeptical as to the country’s ability to overcome the current crisis without massive external help.
It has now been confirmed that a delegation from the IMF and the EU, which were originally to arrive in Athens on Monday, but due to the volcanic ash emergency and airport closures were unable to do so, are now making plans for meetings with the Greek government towards the end of this week. It is widely understood that following these meetings, which the government insists on calling ‘technical’, Greece will officially request EU financial assistance which will help it meet bond obligations from May onwards and until the end of the year.
However, there appear to be widespread market fears that the above institutions may have to put their hands much deeper into their pockets and for a prolonged period of time if Greece is to stave off bankruptcy. Private investors are already seeking ways to decrease their exposure to Greek debt although European banks appear to own some 58% of Greece’s 270 bln euro debt. Greece’s indebtedness to European banks appears to have been one of the key facts that convinced Brussels to take the lead and seek a mainly European solution.
Despite the EU/IMF solution to Greece’s current liquidity problems, market sentiment in Greece but also in several European capitals remains subdued because of the magnitude of the country’s debt which now amounts to more than 113.4% of its GDP. Successive Greek governments’ inability to control expenditure, compounded with widespread corruption, has led to excessive budget deficits which only last year reached almost 13%, i.e three times the EU average. Although the present package, to be officially agreed upon later this week, will ensure that Greece meets all its obligations in the international bond markets, it does not solve the country’s fiscal problem.
According to Wolfgang Munchau, a well known economist familiar with Greece’s economic woes, “the bailout prevents a default this year, but makes no difference whatsoever to the likelihood of a subsequent default. Just do the maths and you will see that Greece needs to raise some 50 bln euros per year over the next five years in order to roll over existing debt and pay interest. That adds to approx. 250 bln euros or about 100% of the Greek annual GDP”.
Munchau’s pessimism is shared by many other analysts who point out that unless Greece manages to do a complete turnaround of its economy over the next three years, drastically curtail government spending and at the same time return to aggressive growth rates to the tune of 5% or thereabout, she will not be able to avoid an eventual default. However, as the economy is set to contract by some 3.5 to 4.0% this year and perhaps more in 2011, and the government does not appear willing to work out a bold economic restructuring plan, the default prospect becomes all the more likely.
Costis Stambolis is a regular contributor, based in Athens.
