EU Treatment of Greece Shows 'Moral Decay': Economist

Πηγή: The Street
By CNBC
March 23 2012

European Union leaders showed "moral decay" in delaying Greece's bond swap deal in order to minimize the impact on the region's banks, according to High Frequency Economics' founder and chief economist, Carl Weinberg.

In a March report on the global economy, Weinberg said EU leaders had deliberately delayed Greece's restructuring, to the detriment of its economy, in order to give banks time to prepare for the hit on their debt holdings.

"Why wasn't Greece allowed to restructure its debt two years ago, before its economy contracted by 15 percent, and before it was necessary to impose a haircut on private sector borrowers, destabilize the government and the economy, illegally implement retroactive collective action clauses, and trigger credit default swaps?" he asked in the report.

"It was inconvenient for the banks, that is why," he said.

Weinberg added that EU leaders forced Greece to go through severe austerity measures in order to give banks time to deal with the debt.

"Politicians preferred to put a few million Greek citizens through the ringer than ask banks to swallow losses on government bonds before they had time to 'prepare'... it would seem that it is not just bankers who have entered an era of moral decay, but the governments that want to regulate them as well," he wrote.

As a creditor representative in the wave of Latin American sovereign debt restructurings in the 1980s, Weinberg told CNBC.com that these earlier deals showed that if properly conducted, Greece's restructuring would neither have triggered credit default swap payments, nor destabilized its economy and government.

In particular, Weinberg highlighted Mexico's 1982 restructuring and Brazil's 1983 restructuring as "clear success stories" carried out "properly and promptly, without being enslaved to political considerations".

Neither Brazil's nor Mexico's debt has required subsequent restructuring, although both nations received substantial loans from the International Monetary Fund [cnbc explains] in the 1990s.

"Mexico and Brazil both undertook reform on their own initiative, and are now model economies," said Weinberg.

In his report, Weinberg added that Greece was in more need of investment to combat its economic woes, than "clever" restructuring.

Next time, Greece may need new tactics

Πηγή: Deccan Herald
By Landon Thomas
March 12 2012

The final private creditor deal announced was supported by 86 per cent of the bondholders.

The Greek government was able to legally strong-arm most of its private bondholders into accepting the debt reduction deal it completed recently. But next time Greece might have much less leverage.

That’s because as a result of last week deal, the bulk of Athens’s 260.2 billion euros ($341 billion) in remaining government debt will now be held by the IMF, the European Central Bank and the individual European nations that have lent Greece money and contributed to the region’s bailout fund.

Politically, Greece would be hard-pressed to force debt losses on such a formidable international group, the way it did with the private banks and hedge funds that have just been forced to accept a 75 per cent loss on their Greek bond holdings. Greece’s main creditors, in effect, are now foreign taxpayers — who are likely to be much less malleable than the private creditors if Greece needs to renegotiate its staggering debt load a year two down the road.

“From now on, whatever happens in Greece, it will be a matter between Greece and the taxpayers of the rest of the euro area,” said Jacob F Kirkegaard, an analyst at the Peterson Institute for International Economics in Washington.

The final private creditor deal announced  was agreed to by nearly 86 per cent of the bondholders; the number was expected to rise to 95 per cent after Athens invoked a so-called collective action clause forcing others to join in. Without such a deal, Greece had strongly implied, it might default altogether, with no one getting paid. The outcome has enabled Greece to reduce its debt load by just over 100 billion euros, or about $132 billion.

Later in the day, the International Swaps and Derivatives Association ruled that the agreement was nonetheless a technical default by Greece — a ruling that will mean payouts on some insurance contracts, known as credit-default swaps, that various investors had taken out on the privately held Greek debt. Around $70 billion in default swaps on that debt are outstanding, although analysts expect the net payout to end up at only $3.2 billion or so.

As recently as 2008, virtually all of Greece’s government, debt was held by private sector bondholders, chiefly banks and investment funds. But as a result of Greece’s escalating debt crisis and intervention by public institutions, private creditors now hold only 27 per cent of Greece’s debt.

Greece, in essence, has become a financial ward of Europe. And, because the IMF will probably be reluctant to put in new bailout money in the coming years, the burden will increasingly fall to Europe, led by Germany, to finance Greece. That will very likely happen directly, through country-to-country loans, and indirectly, through the euro zone’s rescue fund — the European Financial Stability Facility, to which most members of the euro currency union contribute.

As a rule, the IMF does not accept haircuts and insists that its loans are always senior to all other obligations. European politicians, meantime, already under heavy criticism from voters for their countries’ increasing financial exposure to Greece, would have a difficult time explaining why they must take write-offs on some of their Greek debt because Athens still cannot balance its books. And many analysts do expect that Greece will eventually need to ask its public sector creditors to renegotiate its debt.

This deal, the largest debt write-down in history, will provide immediate relief to Greece by cutting back on 15 billion euros, or $19.8 billion, in interest and principal it was paying each year to its private bondholders.

“We do not have the right to waste the money that we will save in interest and debt repayments,” the Greek prime minister, Lucas Papademos, said. But even after the new relief, Greece is still expected to be saddled with a ratio of debt to gross domestic product of 151 per cent in 2012, and 149 per cent in 2013. These debt levels remain the highest in Europe. The Greek economy remains in a wretched state — it shrank by 7.5 per cent in the fourth quarter. And youth unemployment, at 51 per cent, is now officially the highest in Europe.

So it is by no means clear that Athens will be able to generate the cash to service its remaining debt. Analysts differ on the size of the financing gap that Greece will face in the next two years — the sum of money that it will need to fulfill its internal and external obligations. J. P. Morgan, in a research note, put the figure at 20 billion euros, and others have said the amount might be twice that.

There are still loose ends, most notably the remaining private investors who have declined to participate in this deal and could not be forced to do so because their bonds are not governed by the local Greek laws that enabled Athens to strong-arm most of the creditors.

The Greek government said that it had extended the offer to those holdouts to March 23, but that the offer would be withdrawn after that date. Analysts say they expect some holdout investors to sue, but predict that it is unlikely the dissidents will be able to wrangle a better deal, given their fairly small number.

Many analysts say, too, that there may be a benefit to the public sector’s now being Greece’s largest creditor. It might be easier for creditor nations to take collective steps to aid Greece before the next crisis hits, as opposed to trying to persuade a diffuse community of public and private investors, with different interests and agendas, to reach an agreement.

But for Greece, the drawback of owing so much money to Europe and the I.M.F., even at lower interest rates and longer maturities, is that the obligation will always be there.

Greece’s private creditors are the lucky ones

Πηγή: FT
By Nuriel Rubini
March 7 2012

A myth is developing that private creditors have accepted significant losses in the restructuring of Greece’s debt; while the official sector gets off scot free. International Monetary Fund claims have traditional seniority, but bonds held by the European Central Bank and other eurozone central banks are also escaping a haircut, as are loans from the eurozone’s rescue funds with the same legal status as private claims. So, the argument runs, private claims have been “subordinated” to official ones in a breach of accepted legal practice.

The reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors.

Even after private sector involvement, Greece’s public debt will be unsustainable at close to 140 per cent of gross domestic product: at best, it will fall to 120 per cent by 2020 and could rise as high as 160 per cent of GDP. Why? A “haircut” of €110bn on privately held bonds is matched by an increase of €130bn in the debt Greece owes to official creditors.

A significant part of this increase in Greece’s official debt goes to bail out private creditors: €30bn for upfront cash sweeteners on the new bonds that effectively guarantee much of their face value. Any future further haircuts to make Greek debt sustainable will therefore fall disproportionately on the growing claims of the official sector.

Loans of at least €25bn from the European Financial Stability Facility to the Greek government will go towards recapitalising banks in a scheme that will keep those banks in private hands and allow shareholders to buy back any public capital injection with sweetly priced warrants.

The new bonds will also be subject to English law, where the old bonds fell under Greek jurisdiction. So if Greece were to leave the eurozone, it could no longer pass legislation to convert euro-denominated debt into new drachma debt. This is an amazing sweetener for creditors.

Moreover, the official sector began restructuring its claims (both the IMF ones and those with equal status to private ones) well before private sector creditors. Maturities were lengthened – effectively a debt restructuring – and the interest rate on those loans reduced, repeatedly.

This was despite the fact that all official loans should have been senior to the private ones, as they were all extended after the crisis struck; an attempt to resolve it rather than its cause. Historically, bilateral official (Paris Club) claims are treated as equivalent to private ones (London Club) only because such debt builds up for decades as governments lend money to former colonies or allies for political reasons.

But all official lending in the eurozone began after the crisis and should have been senior to private claims. Any senior creditor that extends new financing to a distressed debtor should be given seniority; this is the principle of “debtor in possession” financing in corporate debt restructuring.

Moreover, until PSI occurred, for the last two years official loans by the Troika allowed Greece’s private creditors to exit their maturing claims on time and in full (or with a modest discount for the bonds purchased at high prices by the ECB). PSI came too little, too late.

Also, while the Eurosystem will receive, in the debt exchange, new Greek bonds valued at par, all the accounting profits from this scheme (plus the coupon on the bonds) will be transferred to governments, who have the option of passing these gains to Greece. The result is a haircut of about 30 per cent on these official sector claims. And if the ECB’s Greek bonds are passed – with no loss – to the EFSF, the latter will end up taking the losses for the difference between the bonds’ current low market price and the price at which the ECB bought them.

In conclusion, the idea that Greece’s debt restructuring is all PSI and haircuts, with no official sector involvement, is a myth. OSI started well before PSI; the PSI deal has substantial sweeteners; and with three quarters of Greek debt in the hands of official creditors by 2014, Greece’s public debt will be almost entirely socialised.

Official creditors will be left to suffer most of the huge additional losses that remain likely on Greece’s still unsustainable debt in future. Moreover, the second official sector rescue of Greece will not be the last. Greece will not regain market access for at least another decade; so its fiscal and current account deficits will have to be financed with additional official resources for the foreseeable future.

So, Greece’s private creditors should stop complaining and accept the deal offered to them this week. They will take some losses, but those losses are limited and, on a mark-to-market basis, the debt exchange offers them a potential capital gain. Indeed, the fact that the new bonds are expected to be worth more than the old bonds suggests that this PSI exercise has further transferred losses to Greece’s official creditors.

The reality is that most of the gains in good times – and until the PSI – were privatised while most of the losses have been now socialised. Taxpayers of Greece’s official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece’s past, current and future insolvency.

Why was Greece’s last €71.5bn delayed…again?

IMF's Lagarde, Eurogroup's Juncker and German finance minister Schauble at Thursday's meeting

Πηγή: FT

By Peter Spiegel

March 5 2012

The Greece crisis is entering a crucial week, with private investors deciding whether to participate in a €206bn debt restructuring and Greek officials scrambling to finalise reform measures to release the last €71.5bn in bail-out money in time for a eurozone finance ministers meeting Friday.

The failure of the ministers to sign off on all the aid during a meeting in Brussels on Thursday caught a few people by surprise. Over the weekend, Brussels Blog got its hands on the report by the troika – the European Union and International Monetary Fund team that monitors Greek compliance – showing where Athens came up short.

As we reported last week, the troika evaluation (a copy of which can be found here) held that Greece had completed most of the 38 “prior actions” ahead of Thursday evening, but had not yet fully implemented all of them, particularly in the area of so-called “growth-enhancing structural measures” – mostly a series of changes in wage and collective bargaining laws aimed at driving down costs.

The troika analysis lists these iteams as “mostly done”, and a last minute dispute included in the section – where the Greek government changed the way unemployment benefits were calculated – was switched back at last Thursday’s meeting, according to a senior eurozone official.

Most of the other things that must be completed by Friday fall under the category of “fiscal consolidation”, euro-speak for spending cuts. Here, the prime holdup is implementing legislation, particularly at the local level, for about €240m in cuts to local government grants and spending.

Lastly, more work needs to be done on figuring out what to do with struggling state-controlled ATEbank, the politically-connected Greek financial institution which is sitting on a pile of unrecognised bad loans and is in need of restructuring. A final report on the bank’s disposition is “expected shortly”.

For those following Athens’ progress closely, the original list of the 38 items that needed to be completed and given to Athens two weeks ago can be viewed here.

Argentina as a blueprint for Greece

Πηγή: Jerousalem Post
By AARON KATSMAN
Feb 2 2012

Your Investment: Instead of delaying, why not just admit the truth: Declare bankruptcy and start fixing.

The common wisdom being bandied about by analysts is that Greece needs a bailout and must remain part of the euro zone or else a global financial Armageddon will ensue. According to the Sydney Morning Herald, International Monetary Fund Managing Director Christine Lagarde said during a speech in Germany, “We need a larger firewall,” warning that otherwise the world could slide into a “1930s moment” of isolationism, which led to the Great Depression.”

I guess the question is whether this is actually true. After all, the IMF has a tradition of messing up these situations. Just look at the Asian financial crisis of 20 years ago, or the Latin American crisis of a decade ago. The IMF prescription in these crises exacerbated and prolonged the problems for more time than was needed.

The IMF and the European Union are pushing for a bailout of Greece in exchange for austerity measures. The problem is that the bailout money they are talking about is barely enough to keep the country solvent for a month or two. It sure seems like a black hole. Keep pumping more and more money into Greece in order to delay the inevitable. Is this sound policy? Is this the solution to prevent a “1930s moment”?

Don’t cry for me Argentina

A decade ago, another country was in similar dire straits as Greece is today. No, I am not talking about Israel, which was certainly teetering on the brink, but rather Argentina. There are many similarities between Greece and Argentina, and maybe we can learn from the Argentinean model and apply it to Greece.

Mario I. Blejer, a former governor of Argentina’s central bank, and Eduardo Levy-Yeyati, one of its former chief economists, jointly penned an opinion piece for Bloomberg about the Greek crisis, and they pointed to a lesson that can be learned:

“The first has to do with the timing and size of the debt exchange. In this regard, Argentina’s lessons are clear: Delaying the unavoidable and then defaulting belatedly, unilaterally and in a disorderly fashion, imposes significant costs in real activity, with no visible benefits. True, markets need to see some pain to be convinced of a country’s willingness to pay, in order to accept a default. But Argentina, like Greece now, went way beyond that. By the time Argentina defaulted in 2001, it had experienced four years of recession and its gross domestic product had declined by about 22 percent. How much pain should Greece endure?”

Bob Adelman wrote in the New American about the similarity between then and now: “The Argentine crisis had been brewing for years (some say as far back as 1913 when the welfare state began to be installed) but came to a head when a new government was elected in December 1999 and found itself facing years of mismanagement and fraud left over from the previous administration, including much higher debts and deficits than had been claimed. In December of 2000, Argentina fell for the siren song of the IMF (“we’re here to help you”) and received its first bailout.

“IMF aid made the problem worse. The Argentine currency, the peso, was tied one-to-one to the American dollar and had become grossly overvalued. With foreign trade declining and interest payments to the IMF increasing, the government couldn’t continue supporting the peso. An overnight devaluation of the currency took place, dropping the peso’s purchasing power by 40 percent over one weekend and beginning an inflationary spiral that reached an annual rate of 5,000 percent by the summer of 2002.”

Just do it

Instead of punting the problem down the road another three or four months, why not just admit the truth: declare bankruptcy and start fixing the problems like Argentina? By starting off with a clean slate and a devalued currency, the Argentines where able to extricate themselves from the mess, and from 2003-07 they averaged 9% growth. It wasn’t easy for them, but in the end Argentina has a flourishing economy.

Greece should declare bankruptcy and leave the euro so that it will be free to take the steps it needs to get its economy back on solid footing. It should bring back the drachma, let it devalue and then export its way out of the mess. Greece can’t do that if it is tied to the euro and constrained by EU rules. No one says this will be easy, but it will ultimately lead to living within its means and having a solid economy.

Ansgar Belke, a professor at the German Institute for Economic Research in Berlin, said: “What happened in Argentina proves that it is possible for a country to come back after bankruptcy and once again play an important role in international financial markets. I always supported a restructure of debt in Greece. The damage would not be as grave as is commonly feared. Greece is a relatively small country. A restructure would stagger a few German and French banks... but this scenario is more sensible than the massive credit that we’re currently giving.”

Call for EU to control Greek budget

Πηγή: FT
By Peter Spiegel
Jan 27 2012

The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.

In what would amount to an extraordinary extension of European Union control over a member state, the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders. The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing “all major blocks of expenditure” by the Greek government.

“Budget consolidation has to be put under a strict steering and control system,” the proposal reads. “Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time.”

Athens would also be forced to adopt a law permanently committing state revenues to debt service “first and foremost”.

The German plan, circulated on Friday afternoon to finance ministry officials from eurozone countries who make up the so-called “euro working group”, underscores the depths of mistrust between Greece and its European Union lenders.

Despite the appointment of economist Lucas Papademos as technocratic prime minister in November, attitudes towards Greece within the EU have continued to worsen.European officials privately say that there has been little movement on public sector reforms under Mr Papademos.

A senior Greek finance ministry official said Athens was unaware of the proposal and could not comment. A German finance ministry spokesman declined to comment.

Greek voters have already expressed anger about EU attempts to assist in implementing reforms. Horst Reichenbach, the German national who heads an EU task force to assist Greece, was depicted in German military garb by leftwing Greek newspapers when he arrived last year.

Under the new German plan, Athens would only be allowed to spend on the normal functioning of its government after servicing its debt. If such a law is adopted, the proposal states, financial markets and other creditors would be reassured that defaults would not occur in the future.

“If a future [bail-out] tranche is not disbursed, Greece cannot threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement,” the document said.

Even before Germany circulated its proposal, the EU and International Monetary Fund had presented a 10-page list of “prior actions” Athens must implement before the new bail-out is agreed. According to a copy of the document, also obtained by the FT, Greece must cut an additional 150,000 government jobs within three years.

The document, dated Monday, also calls for major budget cuts in defence, healthcare and “entity closures” to bring down this year’s budget deficit. The document said the preliminary estimate for the 2012 deficit target is about 1 per cent of economic output – implying swinging cuts, since previous estimates by lenders put this year’s budget deficit at 7 per cent.

Negotiations between Athens and EU-IMF officials this week have been stormy. On Friday, talks broke up without a deal on two elements of the EU-IMF plan: a request that Greece’s €750 monthly minimum wage be reduced, as well as elimination of the two-month salary bonus granted to private sector workers as an annual bonus.

George Koutroumanis, the labour minister, instead backed a joint counterproposal by employers and trade unions for a three-year wage freeze, arguing wage cuts would plunge Greece into a deeper recession.

EU, IMF press Greece on reforms, Rehn upbeat on debt deal

Πηγή: Yahoonews
By Reuters
Jan 272012

ATHENS/DAVOS (Reuters) - The European Union and IMF want Greece to push through more budget cuts and implement a series of long-agreed austerity reforms before they sign off on a new bailout the country needs to avert bankruptcy, a report obtained by Reuters shows.

All eyes have been on Athens' tortuous debt exchange talks with itsprivate creditors in recent weeks and a preliminary deal could be wrapped up by Sunday evening, a Greek government official said on condition of anonymity.

"We are one step away from completing the PSI (debt swap) deal,"Finance Minister Evangelos Venizelos said, adding that the country would announce the public offer to its bondholders by February 15.

EU economic and monetary affairs chief Olli Rehn also sounded optimistic on the odds of a deal soon, saying an agreement was "very close" and might be clinched as soon as this weekend.

The head of a panel of German government economic advisers joined a growing chorus of voices calling for the European Central Bank to facilitate a bond swap to lower Athens' debts by forgoing profits on its Greek bonds.

With or without a deal with private creditors, Greece must convince its euro zone partners and the International Monetary Fund that it is doing enough to implement reforms they require in return for a 130 billion euro bailout package it needs to avert a chaotic default.

To do so, Greece will have to make extra spending cuts worth 1 percent of GDP - or just above 2 billion euros - this year, according to a preliminary estimate drawn up by the EU and the IMF in the document outlining the reforms Athens should enact.

Venizelos acknowledged talks with the troika on the bailout were "tough" and that Greece was in "difficult position" because it had lost credibility abroad.

"Greece has not only to commit itself, Greece has to deliver. Not all of the commitments have been fulfilled. That is one of the critical issues to confidence," German Finance Minister Wolfgang Schaeuble said at the annual World Economic Forum in Davos.

Also in Davos, U.S. Treasury Secretary Timothy Geithner pressed the euro zone to boost its bailout fund resources to allow it to shield larger economies such as Italy and Spain.

"Our view is that the only way Europe is going to be successful in holding this together is for them to bring a stronger firewall and that is going to demand a bigger commitment," Geithner told the Forum.

Athens' partners have grown increasingly exasperated with its repeated fiscal slippages and delays on reforms and want to see progress before they wrap up Greece's second multi-billion euro bailout in three years.

Looming elections which could take place as early as April are distracting politicians and senior officials from enacting the unpopular austerity reforms, sources close to the talks say.

Greece's partners are worried about whether a new government would stick to reforms and Schaeuble has said all parties must commit to the reforms, no matter who wins the election.

That might prove to be complicated. Antonis Samaras, whose party leads in opinion polls and is part of the coalition government, opposes any new austerity measures, saying they risk plunging Greece even further into crisis. He wants elections by April 8 at the latest.

Far-right leader George Karatzaferis, whose party also belongs to the coalition government, said on Friday that Greece's lenders should not push the country too far, particularly by asking all of its party leaders to commit in writing to excessive demands.

"No-one should expect a signature of subservience," Karatzaferis said in parliament. "Yes, we assume our obligations but we will not bow to ultimate disgrace."

BUDGET CUTS, PENSION REFORM

Top of the list of measures demanded by the EU, IMF and ECB in return for aid is passing a supplementary budget with more cuts to reach fiscal targets in 2012. The troika suggests large spending cuts in defence and health spending as well as cutting redundant state entities.

The EU and IMF are pressing Greece to adopt a much-delayed reform of supplementary pensions, ensure that a plan to replace only one out of five civil servants leaving the workforce is enacted and want Greece to finalise the opening up of its many closed professions such as lawyers and pharmacists, which they have been demanding for years, the document shows.

They also want the Bank of Greece to complete its assessment of Greek banks' capital shortfall and they expect the government to enact legslation to improve wage flexibility and further liberalise product and service markets, the document says.

The list of measures is not final and could change after discussions with the Greek authorities, the document says. Top EU, IMF and ECB inspectors are in Athens to discuss this, with talks on the new programme expected to go well into next week.

Government spokesman Pantelis Kapsis said the government would try to negotiate on some of the points on the list but repeated that Athens needed the bailout loan to stay afloat.

Asked if Greece would default without the aid, he told Skai TV: "It's obvious, if we don't get the loan, how are we going to find the money?"

Greece's fiscal derailment was plain to see in budget data published on Friday by the country's statistics agency ELSTAT.

The general government deficit, the key benchmark for fiscal targets, reached 17.14 billion euros for the first nine months of the year, ELSTAT said - already just exceeding an initial 17.1 billion euro target for the full year.

The IMF has warned that worsening recession means European governments or banks need to put more into the rescue effort.

The emerging private sector bond swap deal seems set to leave a funding gap of 12-15 billion euros to bring Greece's debt down to a level of 120 percent of annual output regarded by the IMF as sustainable, EU officials say.

DEBT TALKS

Greece and its private creditors made progress on Thursday in talks on restructuring its debt and Charles Dallara, the top negotiator for private creditors, began the latest round of talks with Greek Prime Minister Lucas Papademos on Friday evening.

"We are very close to a deal, if not today then over the weekend and preferably in January, not February. We are very close," Rehn told the World Economic Forum in Davos.

The euro strengthened against the dollar and safe haven German bond futures fell back after Rehn's comments. Italy's six-month borrowing costs fell below 2 percent at an auction in another sign of easing bond market tensions.

Deutsche Bank Chief Executive Josef Ackermann confirmed that private creditors have offered to take losses of almost 70 percent in the debt swap.

After weeks of wrangling over the coupon, or interest rate, Greece must pay on the new bonds it will swap for existing debt, attention has shifted to whether the European Central Bank and other public creditors have to make a contribution too.

ECB board member Joerg Asmussen rejected the call for the central bank to take part in the so-called "PSI" deal being negotiated with private creditors.

"As you know, the abbreviation stands for private sector involvement. The ECB and the euro system are clearly not private," Asmussen told Reuters.

Creditors accept lower rate on Greek debt: report

Πηγή: WSJ
By MarketWatch
Jan 26 2012

FRANKFURT (MarketWatch) -- Private-sector lenders are ready to accept a coupon rate of less than 4% on new Greek bonds that will be issued in a voluntary debt swap, according to a story in Greek newspaper Ethnos, Dow Jones Newswires reported on Thursday. The report said private-sector creditors will submit a new offer with an average interest rate of 3.75% after Charles Dallara, head of the Institute of International Finance and a lead negotiator for private creditors, met with senior bankers in Paris on Wednesday. Dallara is set to resume talks with the Greek government in Athens Thursday. European finance ministers earlier this week rejected a proposed 4% coupon rate on new Greek bonds proposed by private-sector creditors.

Key Greek bondholders meet to reconsider debt deal

Charles Dallara, right, and Jean Lemiere from the Institute of International Finance, which represents Greece's private bondholders, leave Maximou mansion after a meeting with Greek Prime Lukas Papademos and Finance Minister Evangelos Venizelos in Athens, Friday, Jan. 20, 2012. Greece is confident a debt relief deal with private creditors that is crucial to avoid default can be reached "very soon," a government spokesman said Friday.

Πηγή: Kansas City
BY GABRIELE STEINHAUSER

Jan 25 2012

BRUSSELS -- Representatives of Greece's private sector bondholders will meet Wednesday to discuss how and whether to continue talks on a bond swap after the EU toughened its demands, a person close to the investors said.

The so-called steering committee of the Institute of International Finance will gather in Paris for an "important meeting ... to really take stock" of the talks, the person said on condition of anonymity because of the sensitivity of the issue.

The committee represents banks and other investment funds that hold a large part of Greece's debt and are being asked to swap their existing bonds with new ones of a reduced value, longer maturity and lower interest rate.

Eurozone finance ministers decided this week to cap the average interest rate on those new bonds at well below 4 percent. In their last offer, the bondholders said the average interest rate should be above 4 percent.

The finance ministers are pushing for a lower rate because whatever debt relief Greece doesn't get from the investors will have to come from them and the International Monetary Fund, the country's bailout rescuers.

The eurozone and the IMF, however, have made clear that they would not increase their loans for Greece above the euro130 billion ($169 billion) tentatively agreed in October.

The person close to the private bondholders said the meeting was called for Wednesday because some eurozone officials wanted the deal to be ready for a summit of EU leaders on Monday.

The bond swap is crucial to cut Greece's debt by some euro100 billion ($130 billion) and bring it back to a sustainable level. The plan is to have private investors exchange their old Greek bonds for ones with half the face value and to push repayments 20 to 30 years into the future.

A higher interest rate could help buffer losses for investors, but the eurozone and the IMF say it will prevent Greece's debt from falling to 120 percent of gross domestic product by 2020 - the maximum level they see as sustainable. Without the debt swap, Greece's debt would approach 200 percent of GDP by the end of this year.

So far, all sides in the negotiations have been trying to make the bond swap a voluntary deal.

If the investors decide against moving voluntarily accepting the eurozone ministers' tougher terms, the eurozone would face a stark choice between a forced default by Greece or new, bigger aid payments to Athens.

In a forced default, bondholders would likely stand to lose an even bigger part of their investments, though some of them would get payments from bond insurance, the credit default swaps, or CDS.

The eurozone has so far worked hard to prevent a payout of CDS, since the CDS market is obscure - without a clear picture of who owes what to whom - and they worry that it could create uncertainty and panic on financial markets. The private investors also argue that a forced default would make investors more reluctant to lend to Greece and other vulnerable euro countries.

Greek debt deal hinges on interest rate impasse

Greek debt talks are progressing but disagreements remain over the interest rate private sector investors will get on a debt swap.

Πηγή: CNNMoney
By Ben Rooney
Jan 24 2012

NEW YORK (CNNMoney) -- Greece and its creditors in the private sector are grappling over a key detail of a deal aimed at reducing the nation's overwhelming debt load, according to a top eurozone official.

Disagreements remain over the interest rate private investors will be paid on new bonds they receive in exchange for existing Greek government debt, said Jean-Claude Juncker, who heads the Eurogroup of finance ministers from the 17 nations that use the euro.

But progress has been made on other important aspects of the overall response to the European debt crisis.

Speaking early Tuesday in Brussels, Juncker said the ministers welcomed the "increased convergence" between Greece and its private sector creditors on a crucial debt restructuring.

He said the ministers have asked Greek officials to reach an agreement "in the next few days" on the terms and conditions of the agreement with the Institute of International Finance, which represents Greek bondholders.

Under a deal reached in October, private sector investors and banks agreed to voluntarily accept a 50% writedown on the value of Greek government bonds. In addition, investors agreed to exchange Greek bonds for new securities with longer maturities and lower interest rates.

The aim is to reduce the nation's debt load to 120% of economic output by 2020, from about 160% currently.

The European Union has stipulated that the interest rate on the new bonds must be "clearly below 4%" in order for Greece to reach its long-term debt reduction target, said Juncker. But the terms being discussed imply interest rates "well beyond 3.5% before 2020," he added.

"So negotiations will have to be resumed on that accord," said Juncker. "We don't have a final picture of the PSI [private sector involvement] related issuance."

The ministers also called for the swift implementation of a second bailout program for Greece. Officials from the European Union, International Monetary Fund and the European Central Bank arrived in Athens last week to review the nation's finances and begin negotiating the €130 billion program.

"For every one of us, the future of Greece is clearly in the euro area," said Juncker.

During a separate press conference in Brussels early Tuesday, European Commmission vice president Olli Rehn said progress has been made on the debt talks.

"The building blocks are there to reach an agreement shortly," he said "The talks have progressed well and they are close. It is better to do in January than in February."

Meanwhile, the ministers reported progress on other fronts, including the construction of a so-called financial firewall and the details of a proposed fiscal compact.

Juncker said the Eurogroup has finalized a treaty that would allow the European Stability Mechanism, a permanent bailout fund, to be implemented in July, well ahead of schedule.

The €500 billion ESM would be able to run along side the €440 billion European Financial Stability Facility through 2013, he added.

Klaus Regling, who heads the EFSF, said the recent downgrade by Standard & Poor's of the fund's long-term credit rating would not impact its ability to meet current and future commitments.

Regling also said efforts to leverage the fund's resources have moved forward.

A plan to partially insure government bonds issued by troubled euro area nations should be launched later this month, while a special investment vehicle designed to attract outside capital will be ready soon, he said.

The first phase of the bond insurance scheme has already attracted €60 billion from outside of Europe, said Regling. The second phase will be finalized in February. "I'm confident that the scheme, when needed, will be launched and will attract substantial funds," he said.

A world in chaos? That may be a good thing.

The ministers also made progress on the details of the fiscal compact that eurozone political leaders agreed to late last year that is expected to be signed in March, said Juncker.

The compact aims to increase fiscal discipline across the eurozone. It includes legally binding balanced budget requirements, automatic correction mechanisms and new sanctions for member states that fail to comply with deficit rules.

The ministers praised the efforts of Italian prime minister Mario Monti to stabilize his government's finances and restructure the nation's economy. They also called on the Spanish government to implement planned budget reforms as soon as possible.

"While last year was the year of containing the crisis, this year must be the year of resolving the crisis and bringing the European economy back on the path of sustainable growth and job creation," said Rehn.

Greece’s private sector deal unlikely to be final act

Πηγή: FT
By Richard Milne

Jan 11 2012

Ugly acronyms in Europe often hide ugly ideas. The EFSF, short for European Financial Stability Facility, for instance, has not lived up to its billing of offering financial stability.

Now it is time for another acronym to have its time in the sun again: PSI is back in the headlines. Private sector involvement is the rather clunky name for the method of making banks, insurers and other investors take losses on their holdings of Greek government bonds.

Not for the first time, a PSI deal in Greece is imminent. Bondholders are braced for a net present value loss of about 60 per cent, although finer details are still being debated, and in the worst case could be held up again.

The saga is so lengthy – discussion of PSI in October 2010 arguably sparked the most serious bout of contagion in the two-year long crisis – that investors might be minded to dismiss the deal as almost irrelevant with the true action to be found in Italy or Spain. But the reality is that the Greek PSI deal is seeing many of the big issues regarding Europe’s future played out in Athens.

How these issues are settled, and in whose favour, could help set the direction for markets and the single currency for some time.

Few people come out of the PSI debate looking good. Germany and France pushed ahead with it despite warnings from the European Central Bank about the contagion it would, and did, unleash. At certain stages, banks have looked to be getting away with it lightly – even now a 60 per cent loss contrasts with bond prices of about 20 cents in the euro. Hedge funds have reportedly scooped up certain bonds in the hope of freeriding their way to full repayment while other investors suffer.

The most intriguing questions come out of how the PSI deal will affect the ECB and the International Monetary Fund. The ECB is the biggest single holder of Greek bonds.

Because of the PSI’s voluntary nature, the ECB has been able to keep its holdings out of any deal. That costs Greece tens of billions of euros in foregone debt relief.

But it also provokes a fierce reaction among the private sector bondholders expected to take the pain. One, Madrid-based Vega Asset Management, complained in meetings of the steering committee of creditors about the ECB refusing to accept losses on its own bonds.

The current deal is only likely to heighten questions about the ECB’s stance. Greece is likely to copy the recommendations of one of its lawyers, Lee Buchheit, and insert collective action clauses into Greek bonds retroactively. CACs, as they are known, allow a bond’s terms to be modified if a strong majority – often two-thirds or three-quarters – of bondholders agree. The change would then be binding on all parties. The problem with this, as Joseph Cotterill, my colleague on FT Alphaville has noted, is that the ECB would theoretically be subject to any change through the CACs as well. But the ECB has certain weapons that other bondholders do not have. First, it could try to have its holdings somehow excluded from having CACs inserted. More importantly, it is propping up the Greek banking system through its various liquidity measures, giving it a very powerful weapon in negotiations with Athens.

Some bondholders say they have proposed a potential compromise under which the ECB would accept it would not be paid back in full but would not lose money. Analysts estimate that it bought the bonds at a price of about 65-75 cents in the euro; BarCap thinks its mark-to-market losses are about €20bn-€25bn.

Given the ECB’s dislike of PSI, it seems unlikely perhaps that it will suddenly agree to join in. But its stance is hugely important, especially given that many investors believe that only the central bank can help stem the crisis by buying sovereign debt on a far larger scale than currently.

The PSI deal also shines a light on the IMF’s role in Europe. Many bondholders express irritation with the IMF’s hard line in negotiations, pushing for bigger losses. Some argue that officials citing current Greek bond prices is not a good idea as policymakers can help influence them by calling for larger haircuts.

The complications over Greece’s second programme suggest that the IMF will be cautious about intervening in Europe too hastily. Portugal, due to return to the markets next year but which still has 10-year bond yields close to 13 per cent, could soon offer a test.

The Greek PSI deal, assuming it comes, is likely to be the complex and opaque solution that most actors in the eurozone drama seem to like, meaning that it will be tricky for lay people to see who has won or lost. But it is unlikely to be the last act in Greece. To get to anything resembling true sustainability for Greece’s debt burden, questions will have to be asked about not just banks’ holdings but those of the ECB and the official loans from Europe and the IMF. Investors hoping to have heard the last of Greece may well be disappointed for some time.

Greece needs a bigger debt "haircut" - German adviser

Πηγή: Reuters
By Angeliki Koutantou
Jan 7 2012

A 50 percent write-down on Greek debt holdings, part of Greece's debt swap deal, is not enough to put the country's huge debt on a viable footing, an adviser to Germany's finance minister Wolfgang Schaeuble told a Greek newspaper.

Banks and investment funds have been negotiating with Athens for weeks on a bond swap scheme which aims at cutting Greece's debt-to-GDP ratio from 160 percent to a more manageable 120 percent by 2020 and is a key part of a second, 130 billion euro bailout package for the country without which it risks default.

Under the so-called "private sector involvement" (PSI), investors will voluntarily accept a nominal 50 percent discount on their Greek bond holdings in return for a mix of cash and new bonds. But talks have been held up by disagreements over the real cost of the haircut, through factors such as the coupon and maturity of the new bonds.

In an interview with To Vima's Sunday edition, Clemens Fuest, who is also an academic, said the Greek debt haircut should be higher than the agreed 50 percent to help Greece repay its debt.

"This (50 percent) rate was accompanied by the idea it would be associated with a long-term economic consolidation programme, which would reduce the accumulated debt to 120 percent of the annual gross domestic product in 2020," he said.

"But such a reduction is not enough. We had already (a debt of) 120 percent at the beginning of the crisis. So the reduction must be higher than 50 percent."

Greece wants investors to voluntarily sign up to the PSI to avoid triggering a credit event for the country but Fuest said this was putting the deal at risk and that the swap should be compulsive.

"To my view, Greece has already defaulted," he said. "I believe that the best thing would be if one honestly says that the Greek government cannot repay its debt. In such a way, a better settlement could be achieved."

Greece is racing against the clock to put in place long-delayed reforms and meet the terms of the European Union and the International Monetary Fund for continued funding ahead of a crucial visit of the "troika" of its international lenders in mid-January.

A Greek finance ministry official said last week the PSI scheme is expected to be completed around mid-January so that Greece could then conclude the negotiations on the terms of its second bailout. [ID:nL6E8C54JR]

But Fuest warned that the PSI by itself could not help Greece unless it reformed its economy and did not rule out the nation quitting the euro, saying: "I only hope this won't happen."

Echoing Fuest's remarks, Deutsche Bank Chief Economist Thomas Mayer told another Greek newspaper that Greece should put its finances in order to stay in the euro zone.

"Even after the (debt) restructuring, the prospects for the Greek debt remain a big challenge," Mayer told Real News. "It is clear that only a comprehensive programme of economic reforms can save Greece from exiting the euro."