By Patty Griffin
In an attempt to thwart Greece's first sovereign default, governments of the Euro-zone closed in on a deal to unlock a 130 billion-euro ($171 billion) aid package for the debt-ridden nation.
The biggest contributor to euro-area rescue packages, Germany indicated that finance ministers may be ready to back Greece's second bailout in two years when they meet in Brussels in February, 20. Following a week of talks amongst Euro-area officials, Chancellor Angela Merkel signaled that it intends to avoid splitting the timetable of the aid and a write-down of Greek debt to private bondholders, and hence agree to the deal as a single package.
Uncertainty prevailed as Grecce tries offer assurances on debt-reduction goals through the end of the decade, especially with the approach of the March, 20 deadline for bond redemption when Greece is required to pay 14.5 billion euros or it would trigger the first sovereign default in the euro's 13-year history. The Brussels summit has been scheduled to start at 3:30 p.m. instead of the usual 5 p.m.
Michael Gapen, a New York-based economist at Barclays Capital, said in a note on Saturday, "The ongoing saga will likely go down to the wire and is, yet again, another reminder of the fragile nature of the state of affairs in Europe and the potential for a disorderly default."
Germany has pressurized Greek Prime Minister Lucas Papademos to enforce austerity in the nation. As the Greek economy remains stuck in its predicted fifth year of recession, it shrank 7 per cent from a year earlier in the fourth quarter, after the rate of unemployment grew to 20.9 per cent last November.
Over the weekend, the center of focus will be the role of the European Central Bank as it holds talks with Greece to contemplate exempting Greek bonds in national central banks' investment portfolios from a debt restructuring, according to reports.
The euro and global stocks were driven high this week as investors anticipated a conclusion of the seven-month effort to complete the second bailout for Greece. In Berlin, the euro rose 0.2 per cent to $1.3150 after earlier rising to 0.5 per cent.
The second Greek bailout was discussed by Merkel, Papademos and Italian Prime Minister Mario Monti in a conference call on Saturday, as they are confident that finance ministers would "find a solution to open questions" at the Brussels meeting, said Steffen Seibert, Merkel's chief spokesperson.
Despite Greek lawmakers passing austerity measures required for the Greek aid in February, euro-area finance ministers heard conference call this week that the country would miss debt-reduction goals without further measures. The Greek debt would fall to 129 per cent of GDP in 2020, missing a target of 120 percent, as against last year when the level was around 160 per cent.
Signaling flexibility on the target, German Finance Minister Wolfgang Schaeuble said during a panel discussion in Stuttgart today that "the 120 per cent may be 122 per cent or 123 percent, it mustn't be 130 percent." Finance Ministry spokesperson Martin Kotthaus said in a statement in Berlin that "it will definitely take until Sunday night" to resolve the standing questions.
Silvio Peruzzo, an economist at Royal Bank of Scotland in London, said, "Markets are likely anticipating a positive outcome with voluntary participation of the private sector and possibly some ECB involvement. Greece is likely to remain a key risk for the euro area as the implementation of the program feeds the theme of exit from the monetary union."
To finish the swap, Euro-zone officials have kept a window of February, 22 to March, 9, according to what German lawmakers were told during a briefing by government officials on Friday. Meanwhile, Greece is drawing up legislation which could be used to impose losses on investors who are opposed to the debt swap. The law could be reportedly introduced in the parliament soon.
Only once governments authorize the European Financial Stability Facility to provide 30 billion euros to be used in cash or collateral as incentive to investors, can the bond exchange be pursued.
With question marks surrounding Greece's ability to honor its debt-cutting pledges, the region's finance ministers may again withhold approval of the bailout even if they give the green signal to the bond exchange, Citigroup Global Markets analysts said. Such a move would push the dispute closer to a March 1-2 summit of European leaders.
