New Europe |Page 3
5 - 11 February, 2012
With reassuring signs from Italy and Spainthat the two countries are on a sound fi-nancial track, applying effective policies onboth state deficits and banks' recapitalisa-tion, Greece remains the black spot, giventhat Ireland has already entered a ‘virtuouscircle’ that is solidly based on trade sur-pluses, while Portugal's problems are con-sidered negligible.On top of this, the Eurozone looks likely to be protected by a strong firewall to con-tain the present crisis and potential futureproblems, which is being gradually built by its own means plus support from the rest of the world, through the International Mon-etary Fund. Interest rate fall on Eurozonedebt and the rise of stock markets stand as witnesses to all that.As a result the Eurozone, as one financialentity, appears to be almost established on a virtuous path, more so now that Athens saysit has struck a final agreement with its pri- vate creditors (Private Sector Involvement(PSI)) to alleviate the country's debts andthe Papademos government is ready to signa new deal with the EU-ECB-IMF troikato unblock the second soft-loan package of €130 billion for the country.
Much more than €1 trillion
As was published in New Europe on 31 January:
“The 25 EU leaders also decided(on 30 January) that the European Stability Mechanism (ESM) will be activated on 1 July 2012, one year earlier than was initially planned. The total firepower of the ESM, which is to replace the present EuropeanFinancial Stability Facility (EFSF) will bearound €500bn...Most probably, the ESM's firepower will be increased by €250bn in the form of guar-antees, available at present through thenow-operational European Financial Sta-bility Facility...In addition, the surplus Eurozone coun-tries have already started to deposit their increased participation with the Interna-tional Monetary Fund – these new fundsare expected to top up the IMF's firepower by €200bn, to be used only to support Eu-rozone countries in distress.In this way, almost €1 trillion will beavailable in total...”
In addition, there is information suggest-ing that other (non-EU) countries are ready to deposit billions in the special IMF ac-count, which will be used exclusively to sup-port Eurozone countries in distress. Thereason is that emerging economic powerssuch as China, Russia and Brazil have a very strong interest in the Eurozone’s financiallong-term stability, because the 17-country zone constitutes their major source of growth as their best customer. The same is true for large developedeconomies such as the US and Japan. Atthis point, it should be noted that theAmerican central bank, the Fed, has already created a line of almost unlimited dollarcredits for Eurozone banks at almost zerointerest rates, while China, Japan, Russiaand Brazil have expressed keen interest inparticipating in the IMF special account insupport of the Eurozone. There is also further information that theIMF using all its firepower will create an ac-count aimed at supporting the Eurozone with at least €200bn. As a result, the Euro-zone's own resources plus the support fromnon-Europeans through the IMF will addup to at least €1.2 trillion, thus creating ahuge financial arsenal in support of the 17members. In this way, the uncertainty aboutthe Eurozone's fate will definitively be re-moved. But what about Greece?
The Greek ‘bottomless jar’
Sources close to the Athens governmentsay that Papademos had a difficult time inBrussels during this week's EU Summit. He was told by his EU peers that Greece has toconclude both pending deals within this week, namely the PSI agreement with thecountry's creditors and secondly the troikadeal the second soft-loan package forGreece.As to the first issue, Greece seems to havenow concluded a final agreement with itsbanks - the major European banks have ac-cepted that they will lose as much as almost70% of the nominal value on their Greek bond holdings on the basis of present valueestimate – there will be a ‘haircut’ of 50%off the nominal values of these bonds, butthe low interest rate and the longer maturi-ties of the new bonds will result in finallosses of up to 70%. The banks will receive35% in new bonds plus 15% in cash. This may still not be enough to reducethe overall sovereign debt to the desiredmanageable level of 120% of GNP by the year 2020, after the PSI agreement to alle- viate Greek debt is concluded. According toinformation from Athens, this leaves a gapof €15 billion that must be financed eitherby Greece herself, a rather unlikely prospect,or by her peers in the Eurozone or by theEuropean Central Bank (ECB). The mostprobable option is this last, involving theECB.Athens, however, is not allowed to agreeto PSI without having accepted the troika’sterms over the second loan package of atleast €130bn to support the country for aslong as is needed for Greece to be able toself-finance her debts, hopefully by 2015. The difficult part of this agreement is thatthe troika demands deep deregulation of theGreek labour market along with a reshuffleof the entire public sector's wages system. The main friction points are the lowest legalremuneration and the traditional 13th and14th salaries in the private sector. The troikais demanding that the lowest salaries besteeply reduced and the two extra yearly salaries abolished in order to restore thecountry's competitiveness.It should be remembered that the 13thand 14th salaries have already been abol-ished in the state sector and pensions sys-tem. The problem is that the Papademosgovernment is supported by the three majorparties of the Greek parliament, with di- verging opinions on this issue and the primeminister has to conduct negotiations inter-nally, with the leaders of these three parties,and externally with the troika.In any case, the whole Greek packagemust be decided upon by 6 February whenthe Eurogroup, comprising the 17 Euro-zone finance ministers will meet in Brussels. The ministers are expected to decide onboth Greek agreements on PSI and thetroika’s terms for the release of the secondsoft-loan package.
A woman walks by a poster showing a euro coin at a bank branch in Athens, Greece. A financial deal for the country is due to be reached when Eurozone governments meet on 6 February. |
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Eurozone prepares for overall solution