All this week, European financial markets have kept rising, discounting the probability of a swift Greek deal. From Athens to London and from Paris to Frankfurt, stocks have strengthened despite the strong negative political and social reactions in Greece over the troika’s demands for a complete deregulation of the country's labour market.
The troika has been for two years and probably will be until 2015 the only source of finance for the Greek government. Without it, Athens would go bankrupt. On 20 March, a huge Greek bond of €14.4 billion will expire and must be redeemed. Without the support of the troika, Athens will collapse before the end of next month.
In view of these bleak prospects, troika representatives are now in Athens negotiating with the Greek government not only the financial terms of a new soft-loan package but also the policy mix needed to increase the country's competitiveness and thus help it enter a virtuous growth cycle again, as was the case during the first years of the new millennium. But let’s take one thing at a time.
Agreement with all creditors?
As things now stand, it seems that a deal with the country's private creditors (Private Sector Involvement (PSI)) is about to be concluded, providing a ‘haircut’ of 50% on the nominal value of the Greek bonds that they hold. Then comes the equally difficult part, which is finding agreement with the troika.
These final official creditors are gradually undertaking an increasing part of the Greek debt – the European Central Bank (ECB), for example, now holds a round sum of €50bn in Greek bonds, which it bought in the secondary market at reduced prices, over the past 12 months.
Incidentally, it should be noted that if the ECB keeps those bonds until they mature, the central bank will make a huge profit, somewhere in the region of €15bn, which does not make sense, given that the monetary authority is supposed to help Greece and not register profits at the expense of Greek taxpayers.
The ECB
This is why there is now growing pressure by the IMF and Eurogroup President Jean-Claude Junker for the ECB to participate in PSI. If this goes ahead, the ECB could cover the €15bn gap that is expected to remain after PSI is concluded with the banks.
The idea behind this is that the Greek debt should be reduced to 120% of GNP by the year 2020, in order for it to be classified as “manageable” by the IMF. A 50% haircut to the debt paper held by banks is expected to leave a gap of €15bn, exactly this sum that the ECB now being asked to cover for the benchmark ratio of debt to income of 120% to be attained.
The Germans
Berlin, however, seems to oppose involving the ECB in an operation helping a member state to reduce its sovereign debt. The German government argues that such assistance by is forbidden by the central bank’s status. They also point to the possibility of other programme countries such as Portugal and Ireland requesting the same assistance, given that the ECB holds many of their bonds.
The central bank also holds Italian and Spanish bonds, and these countries might ask for the same 'favour' as well. However, it would cost the ECB nothing, because while buying these bonds at reduced secondary market prices, it has written them into its books at buying prices, so now all it has to do is accept a swap of those titles for new ones plus cash in the realisation of the PSI agreement.
If the ECB participates in the PSI, this will greatly facilitate the conclusion of the other agreement between Greece and the troika for the second loan package of €130bn to cover the country's financial needs until 2015.
There has been a first package of soft loans for Greece agreed in May 2010 of €110bn, but Greece failed to meet the terms accompanying it, largely due to a deep recession that claimed more than 10% of the country's GNP in two years. Both packages are financed mainly by Germany, which is why Berlin is insisting that Greece applies further austerity and structural measures along with large-scale privatisations, in order to cover the gap of €15bn after the PSI is concluded.
Tough times in Athens
Unfortunately, political and social life in Greece is disintegrating rapidly and the impoverishment of the middle classes has already accentuated the presence of extremist political formations, on the left and right of the mainstream.
For example, the now-governing socialist PASOK party, with 153 seats in a parliament of 300, is fifth in opinion polls, barely managing 10% of the share. At least two thirds of those 153 deputies will not return to parliament after the next general election this spring, and they have announced that they will be making a 'sortie grandiose' by not voting for the second MOU with the creditors.
If this threat materialises, the Papademos government will fall and the Germans will find nobody with whom to negotiate, but this is something that nobody wants.
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