Even with rescue, Greece not out of the woods

Greece’s fight to win its second international bailout may only open a new chapter in its struggle to remain in the euro area. The rescue plan, which European officials and Greek creditors say may be wrapped up in coming days, includes a loss of more than 70 percent for bondholders in a voluntary exchange and loans likely to exceed the 130 billion euros ($171 billion) now on the table. That won’t stanch the bleeding, say economists including Holger Schmieding of Berenberg Bank in London. Greece will be saddled with too much debt, too little growth and too large a budget hole to do without even more money that euro nations led by Germany are increasingly reluctant to offer, they say. “Greece is in deep trouble,” Schmieding said in a Jan. 30 report. “The current Greek adjustment program is failing. Excessive austerity, a lack of supply-side reforms, administrative incompetence and political deadlock have pushed the Greek economy into an apparent death spiral. More of the same will not work.” As Greek officials negotiate with representatives of the so-called troika -- the European Commission, European Central Bank and International Monetary Fund -- Deutsche Bank AG Chief Executive Officer Josef Ackermann may travel to Athens this weekend for talks over a swap involving Greek debt with a face value of about 200 billion euros. Debt load Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. The aim is to cut Greece’s debt load to 120 percent of gross domestic product by 2020 from 160 percent in 2011. An agreement could be reached “in the coming weeks, maybe days,” said Ackermann, also chairman of the Institute of International Finance. The group, based in Washington, has more than 450 financial firms as members and is representing private creditors in the talks. Meantime, the finance ministers of the AAA rated euro countries -- Germany, Luxembourg, the Netherlands and Finland -- are set to meet today in Berlin to discuss options. “We can’t pay into a bottomless pit,” German Finance Minister Wolfgang Schaeuble said yesterday. “Greece needs a new program, there’s no question about that, but Greece must create the conditions for it.” Exit raised Greece remains in intensive care more than two years after triggering Europe’s debt crisis, testing the patience of other European Union nations. Last November, when discussing the Greek situation, French President Nicolas Sarkozy and German Chancellor Angela Merkel for the first time raised the prospect of a country’s exit from the euro. Failure to control Greece’s troubles helped to push Ireland and Portugal into rescue programs, to raise borrowing costs for Italy and Spain, to embroil the European Central Bank in a controversial program of sovereign-bond purchases and to prompt Standard & Poor’s to strip France of its top credit rating. Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute.

The country is in its fifth year of recession, with a budget deficit still close to 10 percent of gross domestic product and unemployment of around 18 percent. Bond payment Facing a 14.5 billion-euro bond payment on March 20 and general elections as soon as April, the caretaker government of Premier Lucas Papademos must heed familiar calls by the euro area and IMF for tighter austerity in order to complete the talks on a second aid package. The demands are also for lower wage costs and the deregulation of professions including lawyers and truck drivers. Greece will default on its debt and is likely to leave the euro, Nobel economics laureate Paul Krugman said yesterday at a conference in Moscow. “The Greek situation is essentially impossible,” Krugman said. “They will default on their debt. In fact they already have. The question is whether they will also leave the euro, which I think at this point is more likely than not.” Berenberg’s Schmieding said that Greece’s ability to stay in the euro is “very open to question” and that the euro area and IMF need to focus less on austerity and more on improvements to the business environment. Greece, he said, needs a simple flat tax, cuts in red tape and more deregulation. Michael Massourakis, chief economist at Alpha Bank SA (ALPHA) in Athens, said a successful debt swap must be accompanied by measures to bolster growth. “I think then we are into a situation where, with the gradual improvement from the supply side of the economy, we are moving into a better growth profile,” he said in a Jan. 30 Bloomberg Television interview. [Bloomberg]

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