Ominously, all of the above is the “good” news. On Friday as well, talks between private creditors and the Greek government on the re-structuring of that nation’s debt have, for all intents and purposes, broken down. ”There is extreme tension,” claimed a source close to the negotiation. “All parties involved in this crucial negotiation ought to be aware of this very grave condition and assume their responsibilities to avoid the worst. No one should be under any illusion that this would be the worst possible outcome for everyone involved. The results would be catastrophic and not only for Greece or Europe.”
Greece is facing a must-make payment of $17.9 billion on its debt load on March 20th. In October, European leaders had agreed to a second bailout package for the beleaguered nation that required private bondholders to bear part of the burden. A 50 percent “haircut” on the value of those bonds is necessary in order to reduce Greece’s overall debt load by $127 billion. German Chancellor Angela Merkel and French President Nicolas Sarkozy made clear earlier last week that Greece won’t get its next tranche of rescue funding without a deal.
The critical word here is “voluntary.” The lack of an agreement has stoked fears that the Greek government could move to make the debt restructuring compulsory. This would create an official “credit event” (read: “bankruptcy”) requiring banks and other financial institutions to make payments on credit default swaps, and other derivatives used to insure against debt nonpayment. Such an abrupt and disorderly demise of Greek finances would undoubtedly lead to “contagion” throughout the European Union. “It is essential in order to finalize the voluntary PSI [private-sector involvement] agreement that support be given by all official parties in the days ahead,” said Charles Dallara and Jean Lemierre, co-chairs of the Steering Committee of the Private Creditor-Investor Committee for Greece, in a statement on Thursday. Both men met last Thursday and Friday with Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos. News reports say talks will resume this Wednesday, but neither Dallara and Lemierre offered any indication one way or the other.
Further delays may complicate the issue even more. A schedule had been set up in which Greece’s lenders– the EU, the International Monetary Fund (IMF) and the European Central Bank (ECB)–were to provide the country with two separate tranches of financing totaling $19.16 billion, most of which would have been used to meet their March debt payment of $17.9 billion. “The delay would mean this would no longer be feasible, meaning agreements on the PSI and the second bailout are required to avoid a default on the repayment,” said Gustavo Bagattini, European economist at RBC Capital Markets.
As of this writing those private bondholders have “paused for reflection.” The key issue appears to be the rate of interest for the new bonds. Some countries are demanding a level as low as 3 percent. That’s a rather paltry return on an investment paid off in a 20-30 year time frame, according to those critical of that demand.
Thus, the story that “went away” over the Christmas holidays is back with a vengeance. Greece remains in mortal peril, along with the bureaucratic pipe dream known as the European Union. EU-philes will keep kicking the debt can down a road whose last mile is coming closer and closer into view, while the people of individual nations continue to grapple with the implications of seemingly endless austerity, stubborn recession, and a loss of national sovereignty. In other words, meet the new year, same as the old year–if all goes well. If it doesn’t?
It may be 2008–or worse–all over again.
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