The Greek Tragedy Reaches A Dead End
(eToro Blog) In spite of the Greek government's recent assertion that they could avoid debt restructuring through strict adherence of austerity measures, European leaders have, nonetheless, been working to negotiate a deal to aid the fiscally-troubled Eurozone nation. In exchange for a new bail-out package, the deal incorporates tax collection and the privatization of state assets. Some insiders note that, aside from further austerity measures, it also includes incentives to current private bondholders who would agree to voluntarily extend the existing repayment schedule.
Officials negotiating the deal terms are hopeful that at least half of the funds that the Greek government would need through December 2013 (roughly €60 to €70 billion) could be covered by existing loan modifications and the sale of Greek assets. The remainder would come from the IMF and other Eurozone members, as part and parcel of the recently agreed to permanent bailout mechanism.
Before the new Greek deal can be finalized, however, it faces significant and various headwinds, according to some Eurozone officials. They note that should even one government oppose the current proposal, the deal could unravel. They also point out that certain ECB criteria is considered a "threat" to the new deal; the central bank opposes any restructuring which could technically be considered a default, though some Eurozone officials note that, provided the restructure was properly done, the ECB's objections could be surmountable.
Even more troubling, the Greek government is finding it difficult to convince its own citizens to accept the additional austerity measures of higher taxes, plus job and wage cuts, all of which is a prerequisite to the new deal. Too, the government must convince the International Monetary Fund that it will be able to meet all of its financing requirements over the next year; failure to do so could result in the IMF making good on their threat to withhold a portion of the June €12 billion bailout payment.
Time, too, is problematic; if the new Greek deal is not reached by the June 20th meeting of E.U. Finance Ministers, the IMF will be prevented from distributing any more cash, a consequence of Greece's inability to meet budget targets last year. Without the IMF's funds, either the Eurozone members would need to replace the shortfall or the Greek government might default.
According to a recent editorial in Barron's, time is clearly a major problem, and they see the window of opportunity swiftly closing. But they view a new bailout simply as another band aid and not a cure.
In their view, Greece's private bondholders have only one of two options available to them - a not-so-good one, say, accept half the value now, or a worse one, as little as a third, later. According to a Citigroup analysis, if "later" is delayed beyond one or two years, bondholders could discover that they will "never" recover their loans.
But the window's shutting will have far more ramifications than just to Greece's bondholders. As Barron's analysts see it, without an imminent restructure, societal and economic ruin will be meted on Greece. They foresee more and worsening incidences of civil unrest, and an economic depression which could drag the rest of Europe down. The fundamental tenets that are the Eurozone will be shaken to the core, and the common currency along with it.
Barron's argues that Greece, et al, should stop postponing the inevitable and face facts; that all of these ad hoc measures are patently inadequate, and the only way out of their fiscal mess is through restructuring. They point out that the imposition of more austerity measures is likely to hurt the Greek economy even further, perhaps with GDP contracting as much as 3.5%.
They believe that the better course of action would be for Greece to write-down its current debt, even if that results in the recapitalization of Greek banks and requires massive liquidity injections. Financial assistance would, of course, be required of Germany, France and other wealthier Eurozone member nations who have a large stake in Greece's economic survival. They acknowledge that some Eurozone banks may have to seek out new or consider merging with larger financial firms.
As Barron's editors see it, by continually propping up Greece, throwing good money after bad, uncertainty has lingered and the long-term economic growth of the country, and the Eurozone, have been hurt. There's no doubt that bondholders, too, will be hurt. Ultimately, how bad the suffering will depend on how quickly steps are taken to relieve it.
Greece's troubles again weigh heavily on the Euro trading lower against the U.S. Dollar. On the eToro trading floor, investors of EUR/USD, recently at 1.4288, are favoring buying over selling by a 6 to 4 ratio.
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