Eurogroup ready to seal Greek package
The last act in the Greek tragedy, which dictates what Athens must do in order to be saved from disorderly bankruptcy, will be performed in Brussels on the afternoon of 15 February, where the Eurogroup, comprising the 17 Eurozone finance ministers, is expected to give the green light for the application of the Private Sector Involvement (PSI) to alleviate the country's debt by €130 billion.
Greek Finance Minister and Vice President Evagelos Venizelos will then issue an official call on private creditors, aka the banks, to participate in the PSI. This will be the first part of the new package to support Greece, opening the way for the conclusion of the main agreement between the country and its official creditors, that EU-ECB-IMF troika, which will provide new funds of up to €130bn to cover Greece's financial needs for the next few years, until the country is able to tap the capital markets by itself.
A good part of these funds will be used to recapitalise the Greek banks, with anything from €30-40bn – this will form an entirely new Memorandum of Understanding (MoU) between Greece and the troika.
For the Eurogroup to kick-start the entire project, however, its members and in particular the ministers representing the countries providing most of the money (such as Germany) must be convinced that after the second package in favour of Athens is set to work, the sovereign Greek debt, which is presently at 160% of GNP, will be reduced to manageable levels of 120-125% by the year 2020.
To clarify, the troika’s economists will on 15 February submit a report to the Eurogroup tackling the long-term sustainability of Greek debt. However, the report is not only econometric analysis but is also highly political – various sources say that after PSI and the €130bn are made available to Greece, there will remain a 'residue' of €15bn needed for the country's debt to attain the 120% of GNP required.
A good portion of this sum, around €11bn, can be covered by the ECB, if the central bank accepts making no profits on a portfolio of €50bn of Greek bonds acquired at prices that were well below par in the secondary market.
If the ECB withheld those bonds at maturity, it would have made a good profit by redeeming them at face value at the expense of the Greek taxpayer, which was deemed to be unacceptable.
However, if the ECB sells these bonds to the EFSF for exactly the same as it paid for them, thus making no profits or losses, then Greece can buy them from the EFSF at the same price and thus write down the nominal value of the Greek debt by the differential, between their face value and the price paid in the secondary market by the ECB – this difference is estimated as being around €11bn.
ECB Governor Mario Draghi said that the bank will be going for the ‘no-loss option’ – the rest, €4bn, can be financed either by the proceeds from privatisations or by further reductions in the interest rates charged by the country's official creditors for the first package of loans of €110bn, presently at 3-4%. This is for the Eurogroup to decide.
In any case, it seems that the political details of the report on the sustainability of Greek debt will be agreed by tomorrow afternoon, if the Eurogroup is convinced that Greece will live up to its obligations in every other respect.
After the Greek parliament approved by majority (199/300) the austerity measures demanded by the troika, on the riotous night in Athens on 12 February, the Eurogroup is also expecting the two Greek political leaders to sign letters of assurance that they will stick to what they voted for two days ago, even after the next general election is held, sometime in early April.
While for PASOK President George Papandreou one more signature on austerity measures will not pose any problems, as he has now been doing this for two years, such a letter has become a nightmare for New Democracy leader Antonis Samaras, who had the same problem in November 2011.
Well ahead in opinion polls, he is rightly afraid that his backing of the new Memorandum of Understanding with the troika will cost him dearly in votes.
Even on 12 February in parliament, he did not hesitate to say that after the election he will seek (as prime minister?) a renegotiation of the strict terms agreed with the MoU, which is totally unacceptable to Brussels, Berlin and Paris.
Now, just two days later, he is expected to sign a letter undertaking his obligation to apply the austerity terms. Obviously, he is trying to have it both ways, but such an attitude deprives him of any credibility in the European capitals.
Last but not least, the Greek government has must present a convincing savings plan of up to €325 million to the Eurogroup, a residual 'orphan' amount in this years' budgetary exercise for targets to be achieved, which is to be accounted for mainly by cuts in pensions.
If all these issues are settled by the end of 15 February, Greece will begin to apply its second MoU with its Eurozone peers, starting with PSI. The markets seem rather optimistic that everything will go as planned, producing some reasonable gains, both on 13 and 14 February.
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