Editor’s Note: Not again! Weren’t we told a month ago that this problem was fixed? Guess it had to be kept quiet over the shopping season so that spending would be healthy..
Lucas Papademos, Greece’s new technocrat prime minister, faces a race against time to secure a second financing package from the country’s international creditors if Greece is to avoid a disorderly default in March.
The country must redeem a €14.4bn bond on March 20. Almost all analysts agree it will be unable to do so unless its official creditors approve a second €130bn bail-out package and unless a deal is agreed to cut the country’s debt by imposing a 50 per cent haircut on €206bn of privately held bonds.
Greece has already received about €73bn from the first bail-out package of €110bn, financed by the European Union and the International Monetary Fund. That package was approved in May 2010 to help the country stave off default.
Government officials hope the terms of the bond exchange, known as private sector involvement, or PSI, will be finalised well in advance of the EU summit on January 30. By the same deadline, the government hopes to have reached an agreement on “conditionality” – the set of economic policies and structural reforms required by the EU, IMF and European Central Bank.
Only when these requirements have been met will the so-called troika of lenders agree to disburse a large amount of funds, estimated at €89bn, in the first quarter of this year. That will include money towards implementing PSI, since private creditors will most likely receive €30bn in cash or equivalent upfront, while Greek banks will also be recapitalised by some €30bn.
According to a government official, the ECB will also have to receive guarantees from the EU financial bail-out fund, the European Financial Stability Facility, to cover the few weeks that Greece will be in “selective default” after implementing PSI, if the bank is to continue providing liquidity to Greek lenders.
If everything goes well, the bond swap offer will be available to private bondholders in the first two weeks of February and the settlement will take another week, meaning PSI should be implemented by the end of that month, government officials say. If the participation rate among bondholders is insufficient, Greece and its EU partners say they will then decide what to do with the holdouts.
Part of the challenge facing Mr Papademos, the former ECB vice-president who took charge of a temporary coalition in mid-November, is to rally the disparate interests in his government, which includes the socialist Pasok party, the conservative New Democracy party and the smaller nationalist LAOS party.
He recently urged union leaders and employers to consent to some sacrifices to make the economy more competitive and to address the concerns of the country’s lenders.
But his coalition government, made up of 48 members, mostly former Pasok ministers and just three of his own choice, has been criticised for being less productive than some had hoped.
“Time is money. More than six weeks have passed since this government was formed, but it has little to show for it,” says one senior official at a large Greek bank who requested anonymity. “I have respect for Papademos but I am a bit disappointed because I expected more.”
The interim government has secured the sixth instalment of €8bn from the first bail-out package, passed the 2012 budget and taken some significant decisions, such as approving a rise in electricity charges. But it has yet to pass important structural reforms and has not reached an agreement with private creditors, although both the Greek side and the Institute of International Finance, representing the leading banks, are optimistic that a deal is close.
An aide close to Mr Papademos admitted that time could have been used more efficiently, but said: “Deliberations between the political parties participating in the government lead to solutions, but take more time.”
He added that the government was determined to resolve all “pending issues” before the troika arrived in Athens in mid-January. An omnibus bill to be tabled in parliament this week should introduce further reforms required under the terms of the bail-out, including lifting barriers to entry for closed professions.
But some analysts, such as Takis Michas, a researcher at private think-tank Forum for Greece, point out that Greece’s problem has often been that bills are passed, but not implemented.
According to Mr Michas, political parties in government have fewer incentives to implement structural reforms when they know that elections will be held soon. This could be particularly true for the New Democracy party, he said, which leads in the polls by a wide margin over Pasok. Most observers expect an election in March or April.
Christos Staikouras, a spokesman on the economy for New Democracy, told the Financial Times: “We are committed to the implementation of structural reforms and privatisations along with other policy initiatives to restart the economy, but we also want to modify other [fiscal] policies which have not worked.”
