Thursday, February 16, 2012

Bailout 2.0 - almost there?

Yesterday’s Eurogroup conference call did not deliver any results. Next stop for
the Eurozone crisis talks is Monday. It will probably not be the last stop.

It was a very brief press statement. Yesterday’s Eurogroup meeting had not been
cancelled but was shortened to a conference call to discuss Greece. After the conference call, the only official statement released was rather short on new information. Eurozone finance ministers are keeping the pressure high on Greece. The official statement only gave a wrap-up of latest developments, acknowledging the Greek efforts, while at the same time stressing the still missing measures. As it stands now, Greece still has to present additional consolidation measures of 325bn euro and needs to present assurances by all political leaders that austerity measures and structural reforms will be continued after the elections.

Also yesterday, Greece had taken some action to fill both gaps. On the commitment front, while PASOK leader Papandreou had already ticked the box by sending his commitment letter on Tuesday, the ND leader Samaras followed yesterday sending his in turn. On the 325 million shortfall front, intense contacts had been reactivated with the troika at a technical level but no details have been agreed, yet.

Reading between the lines of yesterday’s Eurogroup statement, some Eurozone
countries are still pushing hard for a further loss of Greek sovereignty to ensure that the plans are really implemented. It looks as if earlier proposals like a European controller for Greece or a frozen account for the next bailout package are not off the table. The latter matches recent public statements by German finance minister Schäuble, who hinted at a further loss of Greek sovereignty and even at postponing the April elections.

The next showtime for the Eurozone debt crisis will be Monday 20 February. This will be the next meeting of Eurozone finance ministers when they hope to find an agreement on a next second bailout package for Greece. The official statement sounds encouraging that there will be a decision. However, it will not be an easy meeting. There seems to be a high level of irritation and mistrust from an increasing number of Eurozone countries vis-à-vis the Greek. It looks as if more austerity measures alone will not do the deal.

What do Eurozone countries need to agree to a second bailout package? Judging from
latest statements and developments, it could be the following: Obviously, the additional 325 million euro expenditure cuts by the Greek and credible political commitment by all political parties, preferably even postponing the elections. Moreover, further measures to increase surveillance and ensure implementation of any bailout programme. A clear hint to a reinforced presence of the troika in the Greece and to the French-German idea of the creation of an escrow account meant to prioritise debt servicing. Furthermore, there needs to be an agreement on PSI (which has we have heard so often of the last weeks “is about to be finalised”). Finally, there is still the pending issue of ECB participation. Given latest ECB comments, the latest from Bundesbank president Weidmann, the ECB is still hesitant to “officially” finance any bailout package. Foregoing profits on its Greek
bond holdings seems to be an option but how is still unclear. The option to hold all Greek bonds to maturity and redistribute profits (or not yet realised profits) to national central banks looks like the preferred one. National central banks could then transfer the profits to their governments. However, this option would not reduce Greece’s debt burden. Moreover, it is questionable how this would fit into national legislation. In Germany, for example, it was recently agreed that the Bundesbank profit transferred to the government will gradually be reduced to 2.5bn euro per year. Selling its Greek bonds to the ECB is probably still the most practical option. The big question would be at which price.

The list of unsolved issues for the next Eurogroup meeting on 20 February is not short and the devil is in the details. Latest growth disappointments could even undermine the Troika’s debt sustainability analysis. With latest developments, it cannot entirely be excluded that the Eurozone even finds a way to bridge Greece’s March funding problems without agreeing on a second bailout package. Maybe it is a bit too sceptical but even Monday’s meeting might not yet bring the all-encompassing Greek package.

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