Posts Tagged ‘Lucas Papademos’

Is Greece Headed Towards a Third Bailout?

Monday, April 23rd, 2012

Lucas Papademos, Greece’s prime minister, said that his crisis-plagued country could require a third bailout just weeks after it secured a second round of rescue funds after much discussion in Brussels. Athens may have received the biggest bailout in history but another lifeline could not be ruled out, according to Papademos.  To date, the European Union (EU) and International Monetary Fund (IMF) have committed a total €240 billion to the nearly bankrupt nation.  “Some form of financial assistance might be necessary but we have to work intensely to avoid such an event,” Papademos said, noting that additional spending cuts are inevitable.  Whatever government emerges after the upcoming general election, it is vital that is it prepared for the measures.  “In 2013 – 2014, a reduction in state spending of about €12 billion is required under the new economic program,” Papademos said.  “Every effort must be made to limit wasteful spending and not to further burden salaries of civil servants.”

Greece’s new government will have “about 60 days” to enact long-overdue structural reforms and agree on ways of reining in public debt before officials make a decisive inspection tour in June.  “It is very important that there is no let up in the pace of reforms after elections,” said a senior Papademos aide.  The chiefs of both the EU and IMF missions to Greece said while progress is being made in meeting deficit-reducing targets, a lot of work remains to be done.  “There are still many measures to be taken, painful ones too.  I believe we’ll be able to see in the second half of the year in which direction we’re going, whether we’re on the right path or not,” said Matthias Mors, head EU monitor.

Papademos reiterated that Greece will do everything necessary to remain in the Eurozone, saying the cost of an exit would be “devastating.  More than 70 percent of the Greek people support the country’s continuing participation in the euro area,” he said.  “They realize, despite the sacrifices made, that the long-term benefits from remaining in the Eurozone outweigh the short-term costs.  Greece will do everything possible to make a third adjustment program unnecessary,” Papademos said.  “Having said that, markets may not be accessible by Greece even if it has implemented fully all measures agreed on.  It cannot be excluded that some financial support may be necessary, but we must try hard to avoid such an outcome.”

Private investors in Greek debt wrote down the value of their investment by 53.5 percent, or risk losing everything in a possible default.  Public-sector jobs are being slashed, workers ‘ wages are being frozen, welfare payments are being slashed, and taxes are being raised.  Greece’s official unemployment rate is currently more than 20 percent.  If Greece does default, it could start a domino effect that would drag down other ailing European economies — possibly plunging the Eurozone into recession.

According to Papademos, “The real economy is still weak, and high unemployment is likely to persist in the near future.  The challenging period ahead of us needs to be addressed with great care.  If we do things right, implementing all measures agreed upon in a timely, effective and equitable manner, and if we explain our policy objectives and strategy convincingly, public support will be sustained.  An improvement in confidence would have a positive multiplier effect on economic activity and employment.”

When asked if Greece might return to its old currency, Papademos said “The consequences would be devastating.  A return to the drachma would cause high inflation, unstable exchange rate, and a loss of real value of bank deposits.  Real incomes would drop sharply, the banking system would be severely destabilized, there would be many bankruptcies, and unemployment would increase.  A return to the drachma would increase social inequalities, favoring those who have money abroad.”

Fallout From European Credit Downgrades Still Underway

Monday, January 23rd, 2012

European leaders will this week try to deliver new fiscal rules and cut Greece’s onerous debt burden.  All this in the wake of Standard & Poor’s (S&P) Eurozone downgrades.

France was not the only Eurozone nation to feel the pain. Austria was cut to AA+ from AAA; Cyprus to BB+ from BBB; Italy to BBB+ from A; Malta to A- from A; Portugal to BB from BBB-; the Slovak Republic to A from A+; Slovenia to A+ from AA-; and Spain to A from AA-. S&P left the AAA ratings of Germany, Finland, Luxembourg and the Netherlands the same.

The European Central Bank (ECB) emerged unscathed.  The ratings agency said Eurozone monetary authorities “have been instrumental in averting a collapse of market confidence,” mostly thanks to the ECB launching new loan programs aimed at keeping the European banking system liquid while it works to resolve funding pressure brought on by the sovereign debt crisis.

The talks on Greece and budgets may serve as tougher tests of the tentative recovery in investor sentiment than S&P’s decision to cut the ratings of nine Eurozone nations, including France. If history repeats itself, fallout from the downgrades may be limited.  JPMorgan Chase research shows that 10-year yields for the nine sovereign nations that lost their AAA credit rating between 1998 and last year rose an average of two basis points the next week.

Policymakers worked doggedly to take back the initiative. German Chancellor Angela Merkel said S&P’s decision and criticism of “insufficient”  policy steps reinforced her view that leaders must try harder to resolve the two-year crisis. Germany is now alone in the Eurozone with a stable AAA credit rating. Reacting to Spain’s downgrade to A from AA-, Prime Minister Mariano Rajoy pledged spending cuts and to clean up the banking system, as well as a “clear, firm and forceful” commitment to the Euro’s future. French Finance Minister Francois Baroin said the reduction of France’s rating was “disappointing,” yet expected

The European Financial Stability Facility (EFSF), which is intended to fund rescue packages for the troubled nations of Greece, Ireland and Portugal, owes its AAA rating to guarantees from its sponsoring nations. “I was never of the opinion that the EFSF necessarily has to be AAA,” Merkel said.  Luxembourg Prime Minister Jean-Claude Junker said the EFSF’s shareholders will look at how to maintain the top rating of the fund, which plans to sell up to 1.5 billion Euros in six-month bills starting this week. In the meantime, Merkel and other European leaders want to move speedily toward setting up its permanent successor, the European Stability Mechanism, this year — one year ahead of the original plan.

Greece’s Prime Minister Lucas Papademos said that a deal will be hammered out. “Some further reflection is necessary on how to put all the elements together,” he said. “So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.”

Standard & Poor’s downgraded nine of the 17 Eurozone countries and said it would decide before too long whether to cut the Eurozone’s bailout fund, the EFSF, from AAA.  “A one-notch downgrade for France was completely priced in, so no negative surprise here, and quite logical after the United States got downgraded,” said David Thebault, head of quantitative sales trading at Global Equities.

Thanks to the downgrades, fears of a Greek default also increased after talks between private creditors and the government over proposed voluntary write downs on Greek government bonds appeared near collapse.  Greece appears to be close to default on its sovereign debt, eclipsing the news that France and other Eurozone members lost their triple-A credit ratings.  “At the start of this year, (we) took the view that things in the Eurozone had to get worse before they got better. With the S&P downgrade of nine Eurozone countries and worries about the progress of Greek debt restructuring talks, things just did get worse,” wrote economists at HSBC.

Additionally there are implications for Eurozone banks from the sovereign downgrades.

“The direct impact of further sovereign and bank downgrades on institutions in peripheral.  nations is perhaps neither here nor there given that they are already effectively shut out of wholesale funding markets due to pre-existing investor concerns over the ability of governments in these countries to stand behind their banks,’ said Michael Symonds, credit analyst at Daiwa Capital Markets.

Writing in the Sydney Morning Herald, Ha-Joon Chang says that “Even the most rational Europeans must now feel that Friday the 13th is an unlucky day after all.  On that day last week, the Greek debt restructuring negotiation broke down, with many bondholders refusing to join the voluntary 50 per cent ‘haircut’  – that is, debt write off – scheme, agreed to last summer. While the negotiations may resume, this has dramatically increased the chance of disorderly Greek default.  The Eurozone countries criticize S&P and other ratings agencies for unjustly downgrading their economies. France is particularly upset that it was downgraded while Britain has kept its AAA status, hinting at an Anglo-American conspiracy against France. But this does not wash, as one of the big three, Fitch Ratings, is 80 per cent owned by a French company.”