Debt Crisis in Greece Reaching Critical Stage - Fred Dunsel (01/30/12)
Last Saturday, the Greek government and its private creditors said that they were working out the final elements of a debt-swap agreement, which they expected to be ready this week. In an emailed statement, the Institute of International Finance (IIF), which is negotiating on behalf of the private creditors, said that both sides are “close” to completing a voluntary exchange within a framework outlined by Luxembourg Prime Minister Jean-Claude Juncker. If the agreement does materialize, it will seal a second bailout (worth €130 billion) for Greece, which will then avoid an uncontrolled default on 20 March when it faces a €14.5 billion bond payment. Nonetheless, it seemed unlikely that an agreement could be reached before an EU Summit on Monday (30 January).
The crux of the issue is the interest (or coupon) level for the new 30-year bonds. On 23 January, private investors were still insisting on having an average coupon of about 4.25%, which meant a 69% loss on the current value of Greek debt. In fact, this was already a departure from the previous agreement between bondholders and European officials three months ago of a 50% cut in the total debt value of more than €200 billion (US$263 billion). On 24 January, PM Juncker, who also leads the euro zone’s group of finance ministers, said that the interest level should be “well below” 3.5% for the period to 2020, and below 4% for those over 30 years. While an agreement has yet to be reached, people familiar with the talks have shared that the private creditors might be prepared to accept an average interest level of 3.6% for new 30-year bonds. In addition, the private creditors are also insisting that others who bought the bonds, particularly the European Central Bank (ECB) that is also Greece’s single biggest creditor, take part in the debt-swap agreement.
Even if an agreement were to be reached, the road ahead is still fraught with challenges. Greek Finance Minister Evangelos Venizelos said that besides the debt-swap accord, the country still had labor, structural reforms and pension issues to resolve. Moreover, there have also been reports that Greece would need €145 billion for the second bailout, €15 billion more than what was previously agreed last October.
For now, European officials are hoping that Greece will do what is necessary to avoid exacerbating the debt crisis. IMF Managing Director Christine Lagarde said, “We’re not terribly positive about what has been done, but we want to put together a program for the country. Greece itself has to provide the adjustment.” In addition, while the EU would like Greece to implement deeper budgetary cuts so as to meet deficit targets, the Greek government, concerned over an upcoming election tentatively scheduled in spring, has been resisting such measures.
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