EU Policy Options Narrow to Avert Greek Default

June 13, 2011

Europe's policy options to manage Greece's debt crisis are narrowing fast with the European Central Bank and credit ratings agencies warning against even a voluntary debt restructuring and Athens highlighting the risk of an imminent default unless it gets more EU money.

 

Moody's became the latest ratings agency on Tuesday to warn of a chain reaction of severe consequences for the 17-nation euro area if Greece were allowed to default next month, when it faces a 13.4 billion euro funding crunch.

 

Greece launched a stalled privatization program and promised tougher austerity measures and tax hikes on Monday to meet EU and IMF conditions for the release of a 12 billion euro loan tranche in June, crucial to keep Athens afloat.

 

"A Greek default would be highly destabilizing and would have implications for the creditworthiness of issuers across Europe," Moody's chief credit officer for EMEA, Alastair Wilson, told Reuters.

 

Other stressed euro zone sovereigns could be downgraded from investment grade to junk as a result, he said, widening the gap with the currency bloc's strongest borrowers. Portugal and Ireland would be first in the firing line.

 

Crucially, the ECB and ratings agencies have told politicians that options they are exploring to lengthen the maturities on privately held Greek debt would be interpreted as a default-like "credit event," triggering further downgrades and disqualifying Greek bonds as collateral.

A Greek default could take many forms, including changes in the terms and conditions or a selective reprofiling, Moody's said, adding it would consider all of these as distressed debt exchanges.

 

Finance Minister George Papaconstantinou raised the stakes on Monday evening, saying the International Monetary Fund would not release its share of the June aid payment unless the EU undertakes to cover Athens' 2012 funding needs.

 

"The IMF has made absolutely clear that it cannot disburse if it does not have any guarantee that next year, if necessary, Greece will have (funding) support from the Europeans," the minister told Skai TV.

 

Asked what would happen if Greece did not get the next bailout tranche, he said: "The country will halt payments ... wages, pensions -- all the state's expenses will not be paid."

There was no immediate IMF comment on such a linkage.

 

ECB PRESSES CAMPAIGN

Against this background, the cost of insuring Greek debt against default continued to rise as investors increased bets on a "credit event." It now costs 1.435 million euros to protect 10 million euros of exposure to Greek bonds.

 

Greece's public debt stood at 327 billion euros, nearly 150 percent of gross domestic product, at the end of 2010 and is projected to reach more than 160 percent in 2013 -- a level which market analysts view as utterly unsustainable.

 

The ECB stepped up its campaign against any restructuring, which has become more shrill since the chairman of euro zone finance ministers, Jean-Claude Juncker, said last week the EU was exploring some form of "soft restructuring."

 

"A restructuring is a horror scenario," ECB governing council member Christian Noyer told reporters in Paris. "Greece must apply its (EU/IMF) program entirely and completely ... there is no alternative."

 

ECB policymakers have warned that Greek debt would no longer be accepted as collateral in central bank refinancing operations, driving Greek banks and insurers to the wall and causing huge liabilities for European lenders to Greek firms.

 

Ratings agency Standard & Poor's said this month it would define as a default anything that would have a negative impact on the net present value of a bond. Fitch Ratings has said: "An extension of the maturity of existing bonds would be considered by Fitch to be a default event, and Greece and its obligations would be rated accordingly."

 

Despite such statements, EU policymakers have continued to talk of the possibility of some form of voluntary "reprofiling" of Greek debt as a viable policy option that would not incur the definition of a "credit event."

 

The Dutch newspaper Het Financieele Dagblad reported on Tuesday that euro zone states had secretly started preparing for an extension of the maturity of Greek debt and creating an independent trustee to sell Greek state assets.

 

Dutch Finance Minister Jan Kees de Jager was quoted in the article as saying that reprofiling Greece's debt is a "serious option" but only as a possible final piece in a "total package."

The paper said the plan would entail a voluntary extension of debt maturities by a maximum of three years.

 

EU leaders declared they had adopted a comprehensive package to resolve the euro zone debt crisis in March, but that has not prevented contagion spreading, with Portugal requiring a bailout and markets piling pressure on Greece, Spain, Italy and Belgium.

 

Contagion spread in bond markets on Monday after S&P lowered Italy's outlook to negative over concerns about its deficit and Fitch threatened Belgium with a rating cut, saying the lack of a government was undermining its budget consolidation efforts.

 

* By Ingrid Melander and Paul Taylor, Tuesday, May 24, 2011
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My Response:

 

Do we, then, have a problem? 

 

Is it possible, then, that every country that has pushed a heavily Socialistic/ Socialist agenda in the past 50 years now has a serious problem?

 

When a governing system spends like there's no tomorrow, one of these days that system wakes up broke and what is happening in Greece is also happening in most if not all countries that pushed Socialistic/ Socialist measures over the past half century.

 

Look at any of those counties: France, the UK, Greece, Spain, Italy, Ireland, New Zealand (and the list could be long from here to the moon) - all of them have the exact same problems because they all have made the exact same mistakes and what's actually happening in Greece will inexorably happen to all of them unless we get the message.

 

That message is that free schooling, free healthcare, free social services, weeks and weeks of paid vacation, retirements at 55 and so on and so forth, is totally unrealistic in today's world, and someone somewhere will need to make the decision to stop the madness before countries get at each other's throats, the poor neighbor asking the rich neighbor to wipe his mess.

 

By the way... has President Obama read this news?

 

Gilles A. Herard, Jr.

 

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