The Greek parliament’s vote in favour of austerity plans yesterday (30 June) has cleared the way for approval of the next tranche of its bailout and for progress on a new round of financial help, the EU’s top two officials said. But many analysts believe Greece will eventually have to default.
“This was the second, decisive step Greece needed to take in order to return to a sustainable path,” European Commission President José Manuel Barroso and European Council President Herman Van Rompuy said in a joint statement.
“In very difficult circumstances, it was another act of national responsibility. The conditions are now in place for a decision on the disbursement of the next tranche of financial assistance for Greece and for rapid progress on a second assistance package,” they added.
The Greek parliament approved detailed austerity and privatisation bills in a crucial vote on Thursday, to secure emergency funds and avert imminent bankruptcy.
Lawmakers voted 155-136 for the implementing laws after backing a deeply unpopular €28 billion five-year austerity plan on Wednesday, removing the last obstacle to the next slice of aid from the European Union and the International Monetary Fund.
Van Rompuy and Barroso said conditions were now in place to disburse the urgently needed next tranche of loans to Greece.
Eurozone finance ministers will take the decision at a meeting on Sunday. The IMF is set to follow suit on 5 July.
That €12 billion loan will prevent Greece defaulting in mid-July or August and shift the focus to a second assistance package likely to be about the same size as last year’s €110 billion bailout.
Germany strikes deal with banks on debt rollover
In Berlin, Finance Minister Wolfgang Schaeuble said he had reached agreement with German banks on private sector participation in the new assistance programme, based on a French plan for a voluntary debt rollover.
North European creditor countries, led by chief paymaster Germany, are insisting that private sector bondholders must share the cost of any further rescue, so intensive talks are under way on a “voluntary” rollover of maturing Greek debt.
German institutes were likely to contribute €3.2 billion through this scheme – barely one-tenth of the sum sought from private bondholders. French banks and insurers have the biggest exposure among foreign holders of Greek debt. Greek banks have little choice but to roll over their own holdings.
European Central Bank President Jean-Claude Trichet, who has repeatedly warned the EU against triggering a credit event or downgrade of Greek debt to default, took a cautious line on the French proposal in testimony in the European Parliament.
“At this stage we have not yet [got] a position […] we are very alert but I cannot give you a precise judgement on what is going on. There are several concepts being examined,” he said.
Three banking sources told Reuters on Wednesday that politicians and bankers were confident that implementing the French plan would not trigger a payout of credit insurance or a default that would inflict losses on banks.
Banks had received positive signals from ratings agencies that they would not call the rollover plan a default, the sources said.
But officials cautioned that many details of the plan, including whether there would be any official guarantee, remained to be negotiated.
Market relief may be short-lived
The euro and world stocks rose to three-week highs after the Greek parliament vote as investors expressed relief that the spectre of a sudden summer default had been avoided, despite fierce public opposition to deeper pay and spending cuts.
Greek bond yields fell only slightly but there was a widespread sense that relief may be very short-lived. “The Greek situation has been kicked down the road for a couple of weeks and the immediate prospect of a default is off the agenda for now,” said Michael Hewson of CMC Markets.
“Getting this vote through is one thing, but all it is doing is delaying the inevitable […] Given what is going on on the streets of Athens, you have to question whether Greece can implement these measures.”
Greece still expected to default in the medium-term
Many investors and economists still expect Greece to default in the medium term. Credit insurance markets are still pricing in a nearly 80% chance of Greece defaulting on its €340 billion debt mountain – 150% of annual economic output – within five years.
And one influential international official suggested on Thursday that a default might be better for Athens.
“The current state of affairs where all the Greek taxpayers’ money goes to the creditors cannot continue,” said Angel Gurria, head of the Organisation for Economic Cooperation and Development, a rich nations’ intergovernmental think-tank.
“Greece must be enabled to have a policy that really allows work on the economy’s recovery. This is also best for the creditors,” Gurria told Dutch daily Het Financieele Dagblad. He did not rule out a “haircut” for Greek debt holders.
In Athens, resentment appeared to be growing among politicians against the EU and its largest paymaster, Germany.
Vasso Papandreou, a former European commissioner and member of the Greek prime minister’s PASOK party, told parliament she would vote for the laws as a patriotic duty although she feared the economy would deteriorate as a result.
“Germany is preparing the ground for our official bankruptcy as soon as this can happen without cost to the German banks,” she said, venting a feeling widely shared among Greeks, who say they are suffering to save European bankers.