What’s at stake
The euro was down sharply against the dollar Thursday as yields on the debt of eurozone periphery governments are rising to new heights reflecting the lack of consensus among European leaders on how to increase aid to Greece. Finance ministers from the eurozone and the European Union failed Tuesday to agree on a new level of financial support to Greece, because of differences in the methods of assistance. Ministers should meet again this weekend.
A viewer’s guide to the Greek crisis
Peter Spiegel has a quick primer for what to watch in the coming days. For much of the last month, officials have been fretting that unless they can piece together a new €120bn bailout for Greece by next week, Athens would run out of money. The reason behind the fear was a complicated domino effect that started with the IMF: the IMF was going to withhold its €3.3bn in aid due this month unless the EU could ensure Greece could pay its bills for another year. Greece, however, is going to be unable to pay its bills next year without a new bailout. The second domino came in Germany: The new bailout was being held up by German insistence that private holders of Greek bonds feel some pain in the new bail-out by “voluntarily” swapping their current holdings for new bonds that wouldn’t be repaid for another seven years. That crisis, though, appears to have been resolved – at least for now. The solution is a classic EU fudge: the IMF will make its payment after all, meaning the urgency to get a bailout done by the end of next week has dissipated. But there is a new IMF condition, which brings us to the new crisis: the IMF and the EU want a commitment by the Greek government that it will be able to pass a new round of austerity measures before they give the go-ahead to the new funding.
Charlemagne writes that to try to save itself, Greece must first an extra €6.4 billion worth of fiscal adjustment this year on top of the austerity measures it had already agreed, to remain on its deficit-reduction target and keep the bailout money flowing. And then it will need to find a source to replace the tens of billions of euros it had planned to raise on the market in 2012. That means another EU bailout.
Euro area crisis mismanagement: playing with fire
Charlemagne writes that given the domestic constraints in Germany and elsewhere, the EU has often only acted to avert impending disaster. But even by its standards it is leaving matters very late. It is playing with fire, Greek fire.
Edwin M. Truman argues that the leaders of the euro area have not applied two key lessons of crisis management: (1) use overwhelming force, and (2) ownership is everything. In most financial crises over the past 20 years, the turn in financial market sentiment has come within 18 months. The one exception was Argentina in 2001-02. The euro area crisis is now in its 18th month. The next few days offer the likely last chance for Plan A for the euro area, which had a significant risk of failure even if it had been back by overwhelming force and euro area ownership. Otherwise, it will be on to a very uncertain Plan B.
Ryan Avent writes that it's in the interest of all the negotiating parties to be as apocalyptic in their warnings as possible. If the Greeks don't draw a hard line, they get a raw deal, and the same goes for the European Union, and the constituent governments, and the ECB, and the IMF. Ultimately, everyone expects that the negotiators will back down and an agreement will be reached, but in the mean time it's worth it to negotiate like a madman. The big downsides to this are, first, that it gives everyone reading newspapers a fright. And second, when so many parties are playing this brinkmanship game, there's always a risk that something goes awry and a deal isn't reached.
Who will blink first: Trichet or Schauble?
Megan Greene thinks Germany will end up backing down. Germany’s position was clearly laid out on June 8th in a letter from finance minister Wolfgang Schäuble to his euro zone counterparts and the ECB. In it, Mr Schäuble explains Germany’s demand that private investors be involved in burden sharing through a voluntary bond swap extending Greek debt by seven years. In response to Mr Schäuble’s letter, chairman of the ECB Jean-Claude Trichet clarified the ECB’s stance in a press conference yesterday. According to the ECB, if Greek debt is downgraded by the credit ratings agencies, it will no longer be eligible as collateral in the central bank’s liquidity operations. However the ECB has not excluded a voluntary debt rollover, which would see maturing bonds replaced with new ones.
Christian Chavagneux gets mad at the ECB for tolerating nothing more than creditors voluntarily taking up new bonds when the current ones expires. The ECB threat is undemocratic and unjustifiable for a central bank. Trichet is basically threatening to blow the Greek banking system if leaders ask a little effort to creditors of the country! Not a big effort, just do what they did in the years 1980-1990 for countries Latin America and Africa who could not repay their debts: lending money by extending deadlines.
The real risk to Greece is not Troika disagreements but Greece itself
FT Alphaville quotes a report from JP Morgan, which argues that we should move on from worrying about the dispute between Germany and the ECB on Greek Bailout II and instead focus on what’s happening in Athens. The prime minister is losing support within his own party, and there is huge conflict across the political spectrum and the population as a whole. It is possible that the prime minister will not survive the coming few days. It is increasingly likely that a new government will be formed which will want to renegotiate the terms of the package with less fiscal austerity and fewer asset sales. This could come about either through the formation of a coalition of national unity, or as a consequence of the current government falling and new elections delivering an administration led by the current opposition.
Jacob Funk Kirkegaard argues that a new broadly based government would be great news both for Greece and for the prospects for another international bailout later this month. Recent news indeed suggested that the current Greek center-left Panhellenic Social Movement (PASOK) government might morph into a national unity government including the main Greek center-right New Democracy Party and possibly several technocratic ministers. As clearly illustrated in Ireland and Portugal, elections in crises-stricken peripheral countries do lead to a change in government. But they do not necessarily lead to a break in the public support for parties that favor cooperation with the IMF or Europe. As illustrated in Ireland, too, it should be obvious that the notion that a new Greek government could meaningfully renegotiate the IMF program is not possible.
If restructuring does take place
Free Exchange summarizes a recent paper by Mitu Gulati– an American lawyer who first found that most of the debt Greece has issued since it joined the euro zone is governed by Greek law, and could therefore be restructured by legislation in the Greek parliament. This time Professor Gulati is interested in the few bond contracts that are governed by English law. He has found that since 2009 investors have been willing to pay a premium to hold those English-law governed bonds. The right to sue in an English court offers investors a greater chance of holding out against a restructuring. Some are willing to pay for that chance. Professor Gulati and his colleagues argue that this is a rare example of investors seeking to price default risk. If Europe’s leaders want to incentivize risk monitoring, those investors should be rewarded for their cautiousness. The haircut on English-law governed bonds should be smaller. Professor Gulati has been a regular visitor to Frankfurt this year, advising on potential restructuring mechanisms. Greek bondholders might be wise to check which type of contract they hold.
Mark Mazower, professor of history at Columbia University, points out that Greece has cut and run from its foreign obligations before – at the height of the interwar depression in 1932. When the Venizelos government abandoned the gold standard and stopped payments on its debt, it did so with reluctance and paid a heavy electoral price. But the material costs were bearable. One reason was that other countries were being pushed into bankruptcy. Because the entire international monetary system seized up, interwar Greece lost relatively little in terms of credit forgone.
GIPS vs. Latvia and Iceland
Free Exchange writes that the countries which started the sovereign debt crisis – Latvia and Iceland – are returning to the market (issuing bonds at yields approaching that of Spain) while peripheral euro-zone sovereigns continue to struggle has led to crowing from those who see austerity as a misguided strategy for Greece, Ireland and Portugal. Even Dubai seems to provide a lesson for Ireland in how to deal with its banking debt; while Dubai kept up payments on its official sovereign bonds, it aggressively restructured the private debt of state-owned companies.
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