Political 'Accident' Could Derail New Greek Bailout

Friday, 03 Jun 2011 02:25 PM

 

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A new bailout of Greece looks harder to put together than previous euro zone rescues, as rising political opposition within the country and in some donor states threatens to delay or conceivably block the deal.

Euro zone officials agreed in principle to launch a second Greek bailout that would effectively replace the 110 billion euro ($160.93 billion) scheme put together by the European Union and the International Monetary Fund in May last year, a source close to the talks told Reuters.

The new plan would run until mid-2014, giving Athens an extra year of financial support beyond the original bailout.

It would include some limited participation by private sector holders of Greek bonds, which the original plan lacked.

But Europe's experience with rescues of Greece, Ireland and Portugal over the past year suggests translating the consensus into a concrete, detailed bailout plan accepted by all parties will be difficult, risky and time-consuming.

Political conditions in Greece, Germany and some other euro zone states have worsened in the past year, so a political "accident" that blocks a new deal — with one or more parties simply refusing to sign up to it — cannot be ruled out.

"The market is still anticipating a significant probability that an accident could happen," Commerzbank said in a research note this week.

European officials have indicated they aim to put together a detailed plan by the end of this month, leaving national governments to sort out the mechanics of implementation in the following few weeks or months.

Because governments are desperate to prevent a Greek debt default that could destabilize the entire euro zone, this timetable may ultimately be met.

But even then, Europe will only have bought itself time; it will remain unclear for months or years whether Greece's economy can recover strongly enough for the country to start reducing its sovereign debt mountain.

"They will prevent a forced default, but this still leaves the threat of it eventually happening. It will probably haunt us again next year," said ING's euro zone economist Martin van Vliet in Amsterdam.

Greek Politics

Political resistance to fresh austerity steps in Greece may be the biggest threat to a new bailout deal.

The two main parties have been unable to reach consensus on a medium-term fiscal strategy; even if they achieve this, opinion polls show support for both parties dwindling, and Prime Minister George Papandreou faces a growing revolt within his PASOK party.

A group of 16 backbench members of parliament from the ruling party on Thursday demanded a full debate on further austerity measures and privatizations.

Papandreou's party has 156 seats in the 300-member parliament, so he may be able to continue managing internal discontent without losing control of the legislative process.

The government is expected to ram through a corrective budget for 2011 as a single text without line-by-line voting.

But he must also cross another minefield: Socialist-controlled unions are trying to stop planned privatizations, a key element in the second bailout.

Unions at energy utility PPC have threatened blackouts if the government insists on selling a 17 percent stake in the firm.

"The political planning and handling of the whole bailout plan has not been optimal so far," a senior Greek government official said on condition of anonymity.

"We need to do a much better job from now on."

Governments

Bailout plans need to be approved by all 17 national governments in the euro zone, and hostility to further funding for Greece is mounting in some of the rich north European countries which would contribute most to a new rescue.

"It is definitely harder getting this program through than previous ones. The Greek bailout in May 2010 was the first, and back then people still thought it was a one-off," said Juergen Pfister, chief economist at BayernLB in Munich. "There's a certain bailout fatigue now among parliaments and voters. It is certainly harder to sell this now to the German taxpayer."

It is unclear whether the new Greek rescue would be funded by the euro zone bailout fund, the European Financial Stability Facility, in which case German Chancellor Angela Merkel would not need to seek formal parliamentary approval.

If the rescue were conducted outside the EFSF, she would probably have to go to parliament, exposing her to criticism from backbench rebels.

Because Berlin is keen to keep the euro zone together, many analysts think Merkel will spend whatever political capital is needed to ensure German participation in rescuing Greece.

But support for the bailout in the Netherlands and Finland, while likely, is not completely certain.

The Dutch government would be expected to seek majority support in parliament for fresh funding; the minority Liberal-Christian Democrat government would almost certainly win such support, but it would probably face opposition from its main ally, the Freedom Party, whose leader Geert Wilders is an outspoken critic of bailouts.

Also, the position of the IMF on the new bailout is not yet clear.

The IMF was a key player in past bailouts and could be expected to participate in this one, but it has not so far commented on the agreement in principle.

Former IMF chief Dominique Strauss-Kahn, who resigned last month, may not be replaced on a permanent basis for weeks, which could create a leadership vacuum at the Fund.

Private Sector

Many EU officials think it is important for private sector investors in Greek bonds to share part of the burden of a second bailout, to allow the governments of euro zone donor states to sell the deal to their taxpayers.

But credit rating agencies and the European Central Bank appear for now to have blocked any substantial burden-sharing, by saying a restructuring of Greek debt would probably amount to a default and damage markets around the region.

So EU officials are focusing on the idea of a voluntary rollover of debt under which investors would agree to maintain their exposure by purchasing new Greek bonds as their existing ones matured.

It is still unclear, though, what incentives could be given to investors to convince them to cooperate.

There is talk of giving new bonds preferred creditor status or backing them with assets from Greece's privatization scheme, but these steps would be legally controversial and might still prove insufficient.

"There are no good options. Everything is a hard option or at least a very problematic one," one source involved in discussions of the rollover idea told Reuters.

Capital Economics said in a report that the hurdles to the rollover idea's success "seem extremely high."

"We are still far from convinced that enough bells and whistles can be attached to make such bonds an attractive proposition at interest rates of 6, 7 or even 10 percent," it said.

Long Term

If the second Greek bailout goes ahead, Europe will leave itself open to the charge that by shying away from a major debt restructuring, it is again failing to address the root of Greece's problem and storing up trouble for the future.

"We now view Greece's public debt dynamics as unsustainable and believe a restructuring to be inevitable" in the long run, said Barclays Capital, estimating private creditors might in the end only recover 25 to 28 percent of their investments.

The EU can argue that it makes sense to put off a restructuring until Europe's economies and markets are stronger, and until Ireland and Portugal are emerging from their bailouts.

But Europe's economic recovery is showing signs of slowing and the Greek economy is still shrinking.

Business and household deposits at Greek banks dropped 12 percent in the year to March.

So it is possible that Greece could remain in poor shape when the second bailout ends in mid-2014.

In that case, political trends suggest it would be very difficult for Europe to arrange a third bailout.

© 2014 Thomson/Reuters. All rights reserved.

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