Most Believe Greece Will Seek Aid
Greece will decide sometime during the next few weeks whether to activate the loan mechanism agreed on by EU finance ministers last Sunday. On Monday the Athens government will begin talks with EU, ECB and IMF officials to clarify details of the agreement. Greek Prime Minister Papandreou told reporters, “We will have to make a decision about whether we activate this mechanism in the next few weeks.” Most investors believe Greece will seek outside aid as high borrowing costs are hampering Greek efforts to solve its fiscal crisis. The ambiguity surrounding the loan mechanism has caused investor concern and some are worried that the parliamentary approval required in some euro zone nations could prompt delays in the implementation of the loan mechanism. Some are worried that Germany, where political opposition to the aid package is widespread, could delay approval unnecessarily. Greek Finance Minister George Papaconstantinou indicated that it would take “one week, two weeks maximum” for the implementation of the loan mechanism. Papaconstantinou stated, “We are quite comfortable that once the framework is in place, meaning the program together with the financing elements, we will be able to move very fast.”
Loan Package Not a ‘Bailout’ Says Papandreou
In March the Athens government cut the pay of about 600,000 public sector workers raised taxes and cut pensions. The austerity moves prompted widespread unrest throughout Greece complete with strikes, protests and demonstrations. The European Commission said that Greece should not need to implement more austerity measures if the country taps the aid package. Greece’s central bank governor said the country should speed up deficit cuts by closing several “loss-making and spendthrift” government agencies. Bank of Greece Governor George Provopoulos told reporters, “This is how we will manage to positively please the markets by ourselves, by reducing the deficit by 5 percent (of GDP), instead of the 4 percent we have pledged for in the Stability and Growth Plan.”Prime Minister Papandreou said the loan package was not a bailout and but would give Greece time to solve its problems. Papandreou stated, “It gives us the room to maneuver to make the necessary changes to make our economy a viable one.”
Risk Aversion Pushes Dollar Higher
Concerns about how Greece will resolve its debt crisis has pressured the euro since late last year. The crisis has prompted a rise in risk aversion which has benefitted the US dollar and the yen. On Friday the euro fell 0.3% vs. the US dollar to $1.3533 and the euro fell 0.8% against the yen. Markets are closely watching this weekend’s EU conference in Madrid and will be monitoring Monday’s talks between Greece and EU/IMF officials.
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Markets Not Convinced by Aid Package
The euro fell on Thursday (April 15th) as Greece’s borrowing costs rose prompting concerns that Greece will have trouble servicing its debt. The Greek/German bond spread widened to near record levels putting the troubled euro on track for the largest fall vs. the US dollar in three weeks. EU finance ministers agreed last Sunday on a loan package of 30 billion Euros from the EU and an additional 15 billion Euros from the IMF. Boris Schlossberg of GFT in New York stated, “Markets are not pacified by the bailout package agreed upon last weekend and still consider Greece to be a high default risk.” Recent news reports state that Greece has asked for talks with the EU and the IMF. In a letter sent to the European Union, the European Central Bank and the IMF, Greek Finance Minister George Papaconstantinou asked for talks on “a multi-year program of economic policies.” Papaconstantinou also said that the multi year program “could be supported with financial assistance from the euro-area member states and the IMF, if the Greek authorities were to decide to request such assistance.”
IMF, European Central Bank, European Commission to Meet in Athens
The International Monetary Fund said it will send representatives to Athens on Monday and would be joined by representatives from the European Commission and the European Central Bank. Representatives of the Athens government and IMF officials said that Greece has not decided whether to ask for emergency loans. IMF spokeswoman Caroline Atkinson said that the IMF will focus on Greek policies that could prompt a request for outside aid. Atkinson stated, “When we’re discussing with them the policies that could form the basis, at a certain point that could mutate into a discussion for the (financial) arrangement.”Some analysts say that borrowing costs faced by Greece are unsustainable and that Greece may have no choice but to seek outside aid. Ben May of Capital Economics stated, “The fact that they are asking for clarification on various issues about the mechanism suggests that they are seriously considering activating the package.”
Loans at Below Market Rates
Greek Prime Minister George Papandreou told his cabinet that the nation’s debt crisis, “has created psychological terrorism in our economy and among Greek citizens and we have to deal with that. We must ensure safety and confidence.”EU governments have said that they would provide Greece with three year emergency loans at a rate of 5% which is less than the 7% demanded by investors to hold Greek debt. The EU decision to provide loans would have to be a unanimous decision by all 16 EU nations and markets are concerned that Germany may block or delay the loans.
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EU Remains Divided Over Greek Debt Solution
Some economists believe that the EU/IMF aid package for Greece only offers a short term solution for Greece’s massive debt problems. Financial markets had a positive reaction to last Sunday’s teleconference of EU finance ministers and the euro gained slightly on Monday. The agreement has reduced investor fears of a Greek default which would put the euro under even more pressure and could easily undermine the credibility of the multi nation currency. Some economists say the euro zone remains divided and point out that Sunday’s conference was the third attempt by the EU to boost investor confidence in Greece but that the conference did not address slow European growth and other economic problems in the euro zone. Simon Tilford of the Center for European Reform stated, “This is not a defining moment for the euro zone. What is concerning is that at every stage in recent weeks the EU has been resisting the inevitable and has been forced into action by financial markets. The immediate danger is averted but very little has been done to address longer-term problems. This is not a blueprint for additional crises. It might work for another small country like Portugal but not a big country like Italy or Spain.”
Euro Zone Image Damaged
Should Greece request aid the EU has agreed to a 30-billion-euro ($41 billion USD) three year loan package at 5% interest and the International Monetary Fund would provide 15 billion Euros during the first year. The credibility of the euro zone has already been damaged say several economists by the EU disagreement on how to solve Greece’s debt problems. Some economists fear the debt crisis could spread to other vulnerable EU members. Cinzia Alcidi of the Brussels based European Policy Studies think tank stated, “The image of the monetary union is weakening. The way the Greek crisis is managed and resolved will be crucial to the future of the euro zone and, if the euro survives, to the EU’s future.”
Germany Drops Opposition
The result of Sunday’s conference was a compromise by EU members that Germany would drop objections to Greece receiving loans at below market rates. Previously German Chancellor Angela Merkel had voiced strong objections to any bailout for Greece due to widespread opposition to any Greek bailout by the German public. Merkel is wary of offering any loans in advance of German elections on May 9th. Of Merkel’s previous objections Ulrike Guerot of the European Council on Foreign Relations stated, “I don’t see how she could do a U-turn on what she has been saying until now and release aid before the May 9 election.” In addition to massive deficits Greece also faces falling tax revenues and growth contraction which may make it difficult for Greece to rely solely on market based solutions.
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EU Finance Ministers to Clarify EU/IMF Agreement
Sunday European finance ministers will hold a teleconference to detail how the rescue mechanism for Greece will work. The Finance ministers will be joined by the European Central Bank and the European Commission. At the present time Greek leaders have not asked the EU to activate the rescue mechanism but consider Sunday’s teleconference important. Greek spokesman George Petalotis said, “Greece has not asked (for) the activation of the mechanism. “ He added” It is an important step to detail the terms of the mechanism.” Markets have viewed the EU/IMF agreement as opaque and short on details. Although Greece has not asked for aid and has said repeatedly that it prefers a market based solution the teleconference is meant to insure the safety net will be ready if needed. A spokesman for Eurogroup President Jean-Claude Juncker stated, “There will be a teleconference on Sunday on Greece in the usual Eurogroup composition. Greece has not asked for help, but you have to be ready if they do”.
High Borrowing Costs Hammer Greece
Markets have hammered Greek bonds and bank stocks during the past week driving the heavily indebted nation’s borrowing costs higher. High borrowing costs could easily push Greece to ask for aid. Greek Prime Minister George Papandreou said in a newspaper interview that the Athens government may be forced to ask for a bailout if markets remain skeptical. Papandreou told reporters, “The question remains whether this mechanism will convince markets just as a gun on the table. If it does not convince them, it is a mechanism that is there to be used.” Greek Finance Minister George Papaconstantinou told reporters that clarification about the details of the EU/IMF agreement is needed. Papaconstantinou said, “The aid mechanism is a very important safety net. We have repeatedly said that it was crucial to create and detail it, but we hope and believe that Greece will not use it.”
Greek T Bill Auction Tuesday
EU members have promised to implement a loan package to Greece should market based solutions fail. On Tuesday Greece will auction 1.2 billion Euros ($1.6 billion USD) of 6 and 12 month T Bills but EU officials would not comment on the timing of Sunday’s teleconference. On Friday Papaconstantinou told reporters, “Until now all (bond) issues have been oversubscribed, that shows that despite the turbulence in bond markets there is interest and trust from investors. Our target remains to have better rates and borrowing terms.” To add to Greece’s troubles Fitch ratings agency downgraded Greece’s rating to BBB- , just above ‘junk’ status.
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Investors Remain Nervous Over Greece’s Debt Crisis
The US dollar was mixed against most major currencies in advance of Friday’s upcoming jobs report and continuing euro jitters. Investors see Greece’s high borrowing costs as evidence that the beleaguered nation’s debt troubles are far from over. Greece was able to raise money from bind sales but financial markets demanded higher interest rates for Greece’s debts despite last week’s agreement between the EU and the International Monetary Fund. The EU has agreed to provide two thirds of funding should Greece need it and the IMF has agreed to provide the other third. The Athens government has repeatedly said that it does not need outside financing and has implemented austerity including tax hikes and a cut in pensions. Investors are waiting to see if the EU IMF agreement can restore euro confidence and erase concerns about Greece’s massive debt crisis. The euro has fallen more than 6.5% so far this year and investors are starting to question the sustainability of the multi nation currency that combines economically disciplined countries in northern Europe with free spending southern European nations. In addition to Greece’s woes Portugal’s rating was downgraded by three major ratings agencies. Michael O’Sullivan of Credit Suisse stated, “The issue of country indebtedness is going to be with us all year and next year on a kind of revolving basis.”
Bond Issue Fails to Meet Expectations
Greece’s recent bond sale gave the troubled nation little respite due to less demand than previous bond issues. The 7 year, 5 billion euro ($6.72 billion USD) Greek bond issue was the first test of market confidence after last week’s announcement of an EU IMF rescue plan. The Greek bonds carried a coupon of 5.9% twice what Germany pays on 7 year bonds. Fitch ratings agency said in a statement, “The (euro zone) statement was positive for Greece’ credit profile by enhancing its near-term financing options and flexibility as well as reaffirming the support of euro area member states for economic and fiscal reform in Greece.” Fitch continues its negative outlook for Greece and referring to last week’s agreement and cited a “lack of clarity over the fiscal financing strategy”.
No Indications Greece Will Ask For Aid
The head of the International Monetary Fund has not had much to say since the agency was assigned a subordinate role in the Greek rescue plan. Managing Director Dominique Strauss-Kahn said that there are no immediate indications that Greece would need the agency’s help. Strauss-Kahn also said, “We will move and we will say something only when Greece asks us.”
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