Over the last month the Greeks must have been thanking their lucky stars. For at least a short period the eyes of the financial world were peering somewhere else. Italy and Spain were under the spotlight while Merkel and Sarkozy held their own side show. We have now seen Italy state that it will be implementing harsher austerity and the French announce a new tax on its richest citizens.
But as August draws to a close the eyes of the financial world are suddenly back on Greece because its second bailout package is now stumbling towards crisis under the weight of crumbling European solidarity. Back in July it was believed that Greece had secured another €109 billion bailout package which was required due to the “surprising” deterioration in Greece’s financial position. This package was to include write-offs for bond holders along with additional funding from European nations.
But as I have been reporting recently the deal is now coming unstuck due to back-door deals. Finland demanded that the Greeks put up collateral for their part of the loan and as soon as it became known Austria, Slovenia, Netheralnds and Slovakia also wanted the same. There has been some negotiations since, but it would appear that Finland is not willing to budge:
Finland will insist on having collateral in exchange for backing Greece’s latest debt rescue package, government sources said yesterday, rejecting reports to the contrary.
“Finland will insist on collateral, it is still the criteria for supporting the Greek rescue package. This is non-negotiable,” a government source said.
The source said a report published yesterday by online news source Eurobserver.com, which claimed that Helsinki had given up its demand under pressure from Germany, had misinterpreted Finland’s position, and that the government was only willing to negotiate on what form the collateral would take.
Helsinki and Athens came to an agreement last week on providing Finland with cash collateral for its part of the Greek bailout plan announced in July but the accord was sharply criticised by Germany, Austria, the Netherlands, Slovakia and Slovenia.
Government ministers, including Prime Minister Jyrki Katainen, said this week Finland is open to negotiating a collateral scheme that would be acceptable to the rest of the eurozone nations but that some form of collateral was necessary.
There is now some discussion whether assets earmarked for privatisation could be used as collateral instead of money, but given both are already part of the on-going bailout of Greece the discussion seems irrelevant. If the Finns get their way and receive collateral then many other nations will demand the same. This would significantly reduce the amount of funding available for Greece which was the original intention of the bailout.
On top of that is this little problem:
Finland’s demands for collateral on loans to Greece may trigger a default on $26 billion of bonds sold by Europe’s most-indebted country.
The securities, which represent less than 7 percent of Greece’s $412 billion of bonds, are governed by English, not Greek, law, and include conditions that insist on equal treatment for all investors. Giving collateral to Finland as a condition for aid may breach the requirement that fresh debt does not win repayment priority over existing notes.
“I am pretty sure the Greek government didn’t even know this, their incompetence is legendary,’’ said Andreas Koutras, an analyst at InTouch Capital Markets, a London-based fixed-income adviser. “One should be very careful when giving securities or other collateral, like the Greek government is with the Finns.’’
Whether or not this deal would trigger a default is yet to be tested, but this collateral deal will need to be passed by all eurozone countries, and in my opinion is unlikely to be agreed to. That being the case Finland would probably withdraw from the EFSF. Although Finland’s part in the EFSF is small this will send a very strong signal to the market that the periphery nations are about to be left to fend for themselves as other nations follow Finland out of the deal.
If a deal can be reached then this may seem like a huge stumbling block has been overcome, but this needs to be put into context to understand just how far we are from any real resolution. This is simply a squabble over a short term solution to one of the many symptoms of a problem that as yet no one seems to be interested in addressing.
Angela Merkel once again made that very clear late last week:
German Chancellor Angela Merkel said investors are trying to “blackmail” governments into helping debt-strapped European countries, underscoring the need for all euro-area governments to reduce debt.
“After the states bailed out the banks, the financial markets are again trying to blackmail states and tell them, ‘You’ve made so much debt,’” Merkel said today at a rally of her Christian Democratic Union in the eastern city of Brandenburg, about 50 kilometers (30 miles) from Berlin.
The solution is to press “countries that are highly indebted to really do their homework and get their debt down,” she said. “A Europe with a common currency requires common duties.”
Merkel is underlining her stand on the euro region’s debt crisis in local election rallies in August before national lawmakers vote next month on a second aid package for Greece and an expansion of the powers of the European Union’s crisis fund.
She stood firm in rejecting euro bonds, joint debt issuance by euro countries, which is supported by Germany’s two main opposition parties, the Social Democrats and Greens.
“That’s where we have to put up a clear stop sign and say we won’t do that,” Merkel said. “Everybody has to do their homework. Responsibility has to be pointed out.”
What a bizarre separation of logic. Greece is a highly indebted country that under and EU/IMF plan has been forced to “get their debt down”. Those measure are now destroying the Greek economy and so, in attempt to keep the European banking system from completely imploding, the EU planned to give it another bailout. This has now erupted into a squabbling match over collateral probably because the Finns have quite rightly woken up to the reality that under these circumstances absolutely no one is going to get their money back.
To add even more fuel to that fire the Greek government announced on Friday the terms of its bond swap plan which makes up most of the bailout deal:
Greece said Friday it might only go ahead with a bond swap plan that is a critical part of its second bailout if at least 90 percent of private creditors who hold government bonds participate.
The July 21 bailout plan would see banks and other financial institutions give Greece easier repayment terms on its bonds.
However, in return, Greece has to fund an expensive collateral arrangement, which will secure the remaining value of the bonds and would cost the country about €42 billion, or $60 billion, until 2020.
The Athens Stock Exchange on Friday posted extracts of a letter sent by the government to foreign finance ministers saying that Greece “shall not be obliged to proceed” unless it could get at least 90 percent of its eligible bonds swapped or rolled over. It also said 90 percent of that must be bonds maturing between June 30, 2011, and Aug. 31, 2014.
“If these thresholds are not met, Greece shall not proceed with any portion of the transaction” if it determines — along with international partners such as the eurozone and International Monetary Fund — that the total contribution of the private sector is insufficient for the July 21 agreement to work, the letter said.
The issue with this plan is that Greek banks hold much of their capital in Greek government bonds. Under this deal they are expected to lose another €5 billion. This is on top of the clobbering they have been getting recently as Greeks attempt to get their deposits to safer institutions.
At every step we are now seeing greater and greater push back from the European politicians who are quite obviously more focussed on their own national political agendas. What we have witnessed over the last week or so is simply crisis management. Nobody has a long term strategy and nobody really knows what is going to happen next.
This whole spectacle has once again pushed yields on Greek bonds back to record highs as if the bailout itself doesn’t even exist and in the coming weeks there is still many things that can go wrong for Greece.
Coming up we have changes to the EFSF that need to be voted on, the outcome of the Greek collateral discussions and also a visit by the Troika to Athens to determine if they like what they see. If you were hoping for a quick resolution to Europe’s woes then you are once again going to be disappointed.