Last week, employment minister Louka Katseli said that thousands of Greeks were still receiving pensions despite having been dead for years. This form of social security fraud apparently costs the government €16m a year. This “absurd” state of affairs is a graphic illustration of how little progress Greece has made on its austerity programme, says Wirtschaftswoche. That’s after a year of supposedly strict supervision by the International Monetary Fund (IMF) and the EU. It’s “quite obvious” last year’s €110bn rescue loan package won’t be enough to help Greece get on top of its debt.
So the eurozone is working on a “bailout-of-the-bailout”, as Paul Taylor of The New York Times puts it. The Greek government has agreed to further austerity and reforms. In return there will be a second rescue package, due to be finalised next week. That will be designed to tide Greece over until 2014. It will be worth around €170bn, including €60bn of money from the existing bailout. Privatising state assets is expected to fetch €30bn. The rest will be made up of new loans and, Germany hopes, a contribution from private bondholders.
Germany versus the ECB
The latter element, however, is at the centre of a spat between German policymakers and the European Central Bank (ECB). The standoff will have to end before there can be a deal. Germany, sensing that taxpayers’ patience for yet more bungs to Greece is close to exhaustion, insists that private bondholders share some of the burden. It wants the maturities of Greek debt stretched by seven years. According to credit ratings agencies, however, this ‘reprofiling’ would constitute a form of default, as it would violate the terms of the original contract between Greece and its creditors.
The ECB, meanwhile, is anxious to avoid anything that can be construed as default, or a ‘credit event’. It is open to a voluntary debt rollover, with creditors whose bonds come due over the next three years being persuaded to buy new debt. This would not involve losses and thus wouldn’t be a default, goes the argument.
Quite how willing private investors would be to buy more Greek debt at interest rates that Greece could tolerate is unclear – especially since “it won’t solve the debt problem”, as The Economist points out. Even after a new bailout “Greece will still owe more money than it can possibly pay”. Germany’s finance minister practically acknowledged as much last week when he said that “we must win time” with a new rescue package.
Greece could give up on austerity
By that he means that the highly interlinked European banking system is still fragile and vulnerable to a Lehman-style meltdown if Greece defaults. The trouble is, however, that “the domestic politics of savage austerity and ever-rising debt are poisonous”, says The Economist. Greece has yet to push the new fiscal plan through parliament, and its restive population may baulk at yet more austerity. That raises the spectre of “the worst-case scenario”, says Gary Jenkins of Evolution Securities: “an uncontrolled default”.
The only way out of this crisis is to start an orderly restructuring of Greek debt, says Handelsblatt. That means pre-empting the fallout of a sudden default by preparing a way to shore up the Greek banking system and conducting meaningful stress tests on other European banks to show that they could cope with losses on Greek debt. It also implies being prepared to recapitalise some banks.
As things stand, the ECB and Germany could now fail to agree on a rescue package that won’t solve the problem anyway. In which case, or if Greece pulls the plug, a messy default could be on the cards. Indeed, “the whole situation”, says Michael Derks of Fxpro.com, “remains a mess”.