By the end of 2011, the much feared meltdown of the eurozone had been tamped down by virtue of austerity measures implemented in Italy and Spain after regime changes in both nations.
Moreover, an agreement among the trading partners, the European Central Bank (ECB) and Greece seemed to have been ironed out, with German Chancellor Angela Merkel speaking boldly and carrying a big stick to get Greece to play along.
Greece Agrees to Fresh Austerity Measures
However, the draconian austerity measures that called for serious cutbacks in entitlements to a populace that appears to have grown soft triggered another round of raucous demonstrations well suited for the nightly news and fodder for the 99% versus 1% believers here in the U.S.
That being said, the Greek government agreed on February 8th to fresh austerity measures needed for another $170 billion bailout, according to the Council on Foreign Relations. Writing for the CFR, Christopher Alessi noted that the “potential decision by the ECB, the largest holder of Greek sovereign debt, could reduce the Greek debt burden by around $14 billion.”
Be that as it may, there are still mounting concerns that the deal does not go far enough in reining in the country’s “mountain of debt.”
In short, the ECB stands ready to trade off some of its debt holdings in the faltering nation below par value through a variety of EU banks and other holders of Greek debt. This play has not gained favor with the EU banking community especially in light of the fact that these banks may be forced to take severe haircuts to the tune of 70% in their Greek debt holdings.
Meanwhile, the CFR reportage also notes that “ECB officials remain divided over how to aid a Greek restructuring,” and any concessions require the Greek parliament to implement new austerity measures while working out a whopping $130 billion write down with its creditors.
The Bottom Line
Ultimately, Greece needs to make a pay off by March 20, 2012 on $19 billion debt slated for redemption and without an additional backstop by then a “disorderly default” could occur which would mean an exit from the euro zone, and this does not bode well for European banks that are already trying to come to grips with new capital requirements of the Basel III Accord.
In the final analysis, there is a growing narrative among some observers and EU policy makers that the latest rescue package may fall short, and that Greek will need to go bankrupt, exit the EU and go back to the drachma – a scenario Chancellor Merkel warned would have “unforeseeable consequences” for the eurozone; however, from a distance it seems like Greece and the EU are replaying the brinksmanship game and an 11th hour deal might get worked out.
Source:
C. Alessi, Does the Greek Deal Go Far Enough, Council on Foreign Relations, Feb 9. 2012.
Kyle Colona - Kyle Colona is a freelance writer from the New York area with an extensive background in legal and regulatory affairs.
