Greece is planning a €5bn bond issue this week to test – and reassure – financial markets that it in a position to raise finance all by itself. Greek bankers hoped that the package, in combination with the ECB’s decision to prolong re-finance operations, would ease the pain, and help it allow to raise the €5bn.
“Greece still needs to raise a big amount of money, and there is no guarantee that they can do it cheaply.”
According to The Financial Times Finance the Greek minister George Papacontantinou subsequently denied the story, and said that no decision had been taken. The Greeks are not so much concerned that they won’t raise the money, but the costs may be prohibitively high.
Bloomberg quotes the head of the Greek debt agency that the country would need to raise €15bn by the end of May (we have previously heard higher figures). The country faces €12bn debt repayments in April, with €8.2bn of five-year bonds and €3.9bn of bills maturing that month. It must repay €8.5bn of 10-year bonds in May.
The article quotes investors as saying that uncertainty remains, and that it is not clear that Greece will be able to raise money at the rates it wants. The article also quotes Erik Nielsen of Goldman as saying that Greece will end up receiving some €25bn over the next 18 month, with the IMF share €10bn.
IMF to take lead if Greece fails
The FT has more details on the mechanics of the package to Greece. If Greece is cut off from capital markets, it will be the IMF which will take the lead, to be followed by a second and third tranche from the EU – even though the conditions of the loan would be decided jointly by EU and IMF. The reason is that most EU government cannot simply disburse money, but need parliamentary approval before disbursing the loans.
The article quoted a European official as saying that the conditionality would be on the lines agreed for Latvia, Hungary and Romania. The article also says the European Commission would be making a proposal for enhanced co-ordination of economic policy by the end of May, to serve as a basis “for joint task force reflection”.
Why The E.U. Deal Has Resolved Nothing
It was presented as big agreement, and it succeeded politically. But Wolfgang Munchau writes that this is not a sustainable crisis resolution policy. Lending to Greece at prohibitively high interest rates – which is what this agreement logically implies – is not a true backstop. Default still is – and at those conditions the point will come when Greece will find it financial more attractive default, perhaps after taking EU money, than to go through a program which cannot succeed.
The problem for Greece is that its economy is in far too weak a position to sustain such a massive fiscal retrenchment. It would require at the very least cheap bridging loans to the tide the country over.
Vassilis Zira, of Kathimerini, has listed the many grey areas in the agreement, which includes every almost every detail, such as the amount of the loan, the duration, the interest rate, terms and conditions.
He said the text was worded so that everybody was happy. He notes that the Germans said that they will only pay in the case of bankruptcy (i.e. post default?).
Edward Hugh makes an interesting additional point about the difference in loan rates between the IMF and the EU. If the EU loan were as low as the IMF loan, euro area countries like Spain would complaint, as they would be paying higher rates.
But if the IMF loan rate is significantly cheaper than that of the EU, non-EU emerging market countries will complain as the IMF would be subsidizing Europe.
A Voice From Conservative Germany
Writing in Frankfurter Allgemeine Zeitung Lueder Gerken, a conservative economist, argued that Germany’s exports surplus has nothing to do with the Greek crisis. Greece has benefits from Germany’s savings surplus, which has been re-channeled into the whole of the EU.
The problem with Greece is that unlike other EU countries it has not used the capital imports for investment for consumptions.
Why Leaving The Euro Is Impossible
“For Greece (or any other fiscally-challenged member) to ‘leave the Euro’ involves the launch of a new currency. From scratch. People talk as if the drachma lives on, cryogenically preserved in some icy Limbo for Currencies. So the Greek government could thaw it out overnight, at some devalued exchange rate, and Bob’s your Uncle. This is moonshine. The Euro zone is not a fixed-exchange rate system, it’s a common currency area. The drachma has been abolished. This parrot is deceased.”
If Greece left the euro, it would end up like euroized Montenegro, with the exception that, unlike Montenegro, it would have an unloved domestic currency, the new Drachma. The euro will continue to be the currency of choice.
Spain Is Delighted About The Euribor
It’s Monday, and while others newspapers report the foot-scores, Spanish newspapers report the Euribor rates – which in Spain form the basis for the majority of mortgages.
The three-month Euribor, the most important for the Spanish housing sector, has fallen from a peak of 5.4% in 2008 to 1.215% in March this year, which provides significant comfort to Spanish mortgage holders, many of whom must now in negative equity territory after the fall in their house prices.
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