Consequences of Debt Restructuring
What Would a Greek Haircut Mean for Germany?
By Sven Böll 05/27/2011
It's the worst-case scenario: Greece no longer able to get loans, with creditors having to wave goodbye to a chunk of their money. But what would it mean for Germany? Would the state have to bail out the banks again, and would private investors also suffer badly? SPIEGEL ONLINE takes a look at the likely consequences.
It may only be a small passage in the statutes of the International Monetary Fund (IMF), but it is the bottom line: An organization can lend money to a country only if it is certain the state will remain solvent for at least one year. Washington experts are increasingly doubtful that this minimum requirement can be guaranteed in the case of Greece.
The heavily-indebted state is due to receive a further tranche of its €110 billion bailout package -- one-third of which is provided by the IMF, with the other two-thirds coming from the European Union -- at the end of June. But if the Greek austerity and privatization measures do not meet the IMF's requirements, with the result that the fund decides not to release the payment, Greece could face the prospect of default.
Whether the euro-zone countries would take over the IMF's share in such a scenario is unclear. Which is why Greece's European partners are probably not too unhappy about the IMF's doubts. They function as a warning signal for Greece that the chips are down: Time to stop playing around.
In any case, the situation has led to another grim scenario, one which has been discussed on the financial markets for weeks, becoming more likely: Greece has so much debt that the state is hardly likely to ever be able to fully repay the money to its foreign creditors. Most, if not all, now accept that some form of debt restructuring will be necessary, and that this could involve reductions of up to half of Greece's debt.
A debt reduction -- known as a "haircut" -- of as much as 50 percent would be an expensive proposition for Greece's creditors. With around €330 billion ($467 billion) in loans, that would mean cutting as much as €165 billion. Most of Greece's debt is with foreign creditors, and so foreign banks and governments would have to take massive hits over the loans Athens is unable to repay in full. more
Greece fails to agree austerity measures
Greece's prime minister failed to persuade opposition parties Friday to support stricter austerity measures for the indebted country, as the EU and IMF threaten to withhold financial aid until consensus is reached.
By News Wires 27/05/2011
REUTERS - Greece’s prime minister failed to convince opposition leaders on Friday to support tougher austerity measures to free up EU/IMF aid needed to avert a debt default.
The European Union is demanding that Greek politicians reach a national consensus on long-term economic and fiscal reforms before it will provide more funding for the indebted euro zone state, although Brussels is also urging the IMF to be more flexible.
The leader of Greece’s main conservative opposition party said after five-hour emergency talks with Socialist Prime Minister George Papandreou: “We don’t agree with a policy that kills the economy and destroys society.
“There is only one way out for Greece, the renegotiation of the bailout deal,” New Democracy leader Antonis Samaras added.
New Democracy has rejected proposed tax increases to help reduce the budget deficit, arguing instead for tax cuts to revive economic growth.
The Athens stock exchange reversed gains on news of the failure to reach a deal and was trading 2 percent lower on the day by 1400 GMT.
Financial markets were spooked on Thursday when Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, warned that the International Monetary Fund could withhold its contribution to a 12 billion euro ($17 billion) aid tranche Greece needs next month to pay its bills and service its massive debt.
The IMF has said it cannot release the money unless European partners guarantee they will meet Greece’ funding needs for the next 12 months, something Germany and other north European creditors are unwilling to do without major Greek concessions. more
It's ever more obvious, Greece must leave the euro
I've hardly been alone, but that's no excuse. For more than a year now, I've been regularly predicting the euro crisis's final denouement, yet still it hasn't arrived.
By Jeremy Warner, Assistant Editor 7:42PM BST 25 May 2011
So I've been forced to reach a different conclusion; perhaps it never will. Instead, the eurozone has entered a seeming state of permanent crisis. In desperation, European policymakers have adopted a very British characteristic – the hope that they can somehow just muddle through.
But though no one can know the exact timing of the endgame – that's ultimately for the politicians to decide, so no time soon might be a reasonable bet – it's now fairly clear what that endgame must be.
What's presently being played out among the GIPS (Greece, Ireland, Portugal and Spain) is final proof that you cannot have a monetary union of such size among sovereign nations without compensating fiscal union. That simple underlying truth leaves the euro facing a choice between two equally unappetising outcomes.
Either the richer countries carry on bailing out the poorer ones more or less indefinitely, rather in the manner that Germany subsidises its formerly communist East, or membership of the euro has to be reconstituted on a smaller and more sustainable basis. There's really nothing in between. The longer European policymakers remain in denial about this choice, the worse the situation will become.
So it's with a sense of weary familiarity we approach the latest impasse. The European Central Bank is implacably opposed to debt restructuring, but the eurozone's solvent Northern states have reached the limit of their appetite for further bail-outs. This leaves Greece in an impossible position; it can neither reduce its debt burden through restructuring, nor will anyone lend it more money.
Who knows, maybe this time, the Greek sub-plot really will bring the euro's wider crisis to a head. Greece is apparently unable to agree additional austerity measures so the International Monetary Fund is refusing to release its share of the next €12bn tranche of bail-out funding, or at least not until – and please don't laugh – its eurozone partners commit to more aid for Athens to plug next year's funding gap. moreSo what do the Greeks have to say about this?
Greeks Occupy Central City Squares Arab Style
Wednesday, 25 May 2011
Maria Damanaki ex-KKE but PASOK for the last two decades and a Euro Commissioner stated in the EU today that 'either the Greeks adopt the 2nd round of cuts and privatisations' with a unity across the two major parties, or Greece will return to the Drachma.
Taking into account her current postion as an EU Fisheries Minister, she cant be saying things without high level agreement with Papandreou. It is being used to threaten and cajole the Opposition Parties (var the KKE) to allow PASOK to get through its legislative programme of more cuts by forcing the 180 votes required in Parliament this time (2/3 of total) otherwise the government will fall. New Demccracy traidtionally the pro-American party may be seeking a Euro exit for Greece.
The government doesn't seek elections as it would lose so it is now pushing for a Plebiscite for the new round of measures sought by the IMF
At the same time over the last few days, influenced by the Spanish events 300 Greeks have occupied Sindagma Square (most of them are ex- Spitha members) and today they called a facebook protest on the square and 150,000 have signed up on Facebook which has collapsed in Greece. moreAnd putting it all in perspective, we have Hudson.
Is Iceland's Rejection of Financial Bullying a Model for Greece and Ireland?
Breakup of the Eurozone?
By MICHAEL HUDSON May 27, 2011
Last month Iceland voted against submitting to British and Dutch demands that it compensate their national bank insurance agencies for bailing out their own domestic Icesave depositors. This was the second vote against settlement (by a ratio of 3:2), and Icelandic support for membership in the Eurozone has fallen to just 30 per cent. The feeling is that European politics are being run for the benefit of bankers, not the social democracy that Iceland imagined was the guiding philosophy – as indeed it was when the European Economic Community (Common Market) was formed in 1957.
By permitting Britain and the Netherlands to blackball Iceland to pay for the mistakes of Gordon Brown and his Dutch counterparts, Europe has made Icelandic membership conditional upon imposing financial austerity and poverty on the population – all to pay money that legally it does not owe. The problem is to find an honest court willing to enforce Europe’s own banking laws placing responsibility where it legally lies.
The reason why the EU has fought so hard to make Iceland’s government take responsibility for Icesave debts is what creditors call “contagion.” Ireland and Greece are faced with much larger debts. Europe’s creditor “troika” – the European Central Bank (ECB), European Commission and the IMF – view debt write-downs and progressive taxation to protect their domestic economies as a communicable disease.
Like Greece, Ireland asked for debt relief so that its government would not be forced to slash spending in the face of deepening recession. “The Irish press reported that EU officials ‘hit the roof’ when Irish negotiators talked of broader burden-sharing. The European Central Bank is afraid that any such move would cause instant contagion through the debt markets of southern Europe,” wrote one journalist, warning that the cost of taking reckless public debt onto the national balance sheet threatened to bankrupt the economy.
Europe – in effect, German and Dutch banks – refused to let the government scale back the debts it had taken on (except to smaller and less politically influential depositors). “The comments came just as the EU authorities were ruling out investor ‘haircuts’ in Ireland, making this a condition for the country’s €85bn (£72bn) loan package. Dublin has imposed 80 percent haircuts on the junior debt of Anglo Irish Bank but has not extended this to senior debt, viewed as sacrosanct.” (Ambrose Evans-Pritchard, Daily Telegraph.)
At issue from Europe’s vantage point – at least that of its bankers – is a broad principle: Governments should run their economies on behalf of banks and bondholders. They should bail out at least the senior creditors of banks that fail (that is, the big institutional investors and gamblers) and pay these debts and public debts by selling off enterprises, shifting the tax burden onto labor. To balance their budgets they are to cut back spending programs, lower public employment and wages, and charge more for public services, from medical care to education. more