May 29, 2011

Euro mess going from bad to worse

Germany's Der Spiegel after the breaking news of few weeks ago of a secret meeting that would consider the expulsion of Greece from the Eurozone, it is once again stirring passions with an article claiming that Greece has missed all fiscal targets agreed under its bailout plan, according to a mission from an international inspection team, putting further funding for Athens at risk, Reuters summarizes. "The troika (aka the International Monetary Fund, the European Commission and the European Central Bank) asserts in its report to be presented next week that Greece had missed all its agreed fiscal targets," weekly Spiegel magazine reported in a prerelease.

Also from Reuters:

The mission will be holding meetings next week before an expected finalisation of the report.
"The deficit in the public budget was higher than expected," the magazine said, referring to the report's findings.
"The reason is that the Greek government still spends more than agreed in the aid programme. On top of that tax income is still lower than demanded."
The IMF has already said it cannot release its part of a 12 billion euro aid tranche to Greece next month if fiscal conditions underpinning the bailout are not met and the European Commission's top economic official was quoted as saying the EU was setting the same conditions.
"We Europeans have the same conditions as the IMF," EU Economic Affairs Commissioner Olli Rehn was quoted as saying in the same prerelease for Monday's Spiegel magazine.
"We will decide on the next tranche after the troika's report. The situation is very serious," Rehn added.


There is, however, one possible last ditch rescue, a firesale of Greek assets:

EU officials have asked Athens to step up privatisations urgently and suggested setting up a trustee institution to help oversee the process, similar to the body that privatised East German companies after the fall of communism. Spiegel magazine also said the troika's experts estimated Greece had assets worth 300 billion euros, which it could sell off to meet its targets.

After 1 hour, Greece replied as usual to Der Spiegel:

Greek Finance Minister George Papaconstantinou on Saturday denied a German magazine report that an international inspection team had concluded Greece had missed all its fiscal targets.

"Reports such as the one in Spiegel have no relation to reality. Negotiations continue and will be completed in the next few days. We have every reason to believe the report will be positive for the country," he told Greek Mega TV.


But Juncker is confirming targets are being missed:

Eurogroup head Juncker said yesterday that the IMF would probably not be able to make the next disbursement disbursement, as the re-financing of Greece over the next 12 months is not secured (the €26.7 billion Greece was supposed to get from private investors in 2012). By August 20 the Greek government has to redeem €7 billion in debt falling due, though there are of course other payments the Greek government has to make, implying that Euro-zone governments need to come up with a solution fast.

It is difficult to say at this stage how important it will be to have the participation of the private sector in order to overcome public resistance in some creditor countries to another aid package. In any case, without more credible efforts from the Greek government to reform/privatise, this hurdle could be too high to overcome, and there might be not a second package.

The first task at hand for Euro-zone governments is to find a replacement for the IMF money if the IMF does decide it is not in a position to disburse the next tranche.

Otherwise, we may get a Greek debt restructuring much faster than previously thought.


And if Greece is bad enough the black hole in Ireland is getting worst:

In comments to The Sunday Times newspaper, Irish Transport Minister Leo Varadkar said the country will likely need another "unexpected" loan, after he became the first cabinet member to cast doubt in public on Ireland's ability to raise cash.

Deputy Prime Minister Eamon Gilmore told broadcaster RTE that fears of a domino effect from Greece's problems were overblown. The possibility of a Greek default has sent bond yields rocketing for indebted Ireland, Portugal and Spain.

"It's not a situation that if Greece defaults then there are immediately implications for Ireland," Gilmore said.

"If Greece defaults there are implications for the wider euro zone and obviously we are part of that."


Ireland, meanwhile, wants to tap investors for funding in 2012 before its 85 billion euros EU-IMF bailout runs out the following year.

But investors believe Ireland will be unable to return to the market and instead will have to tap the European Union's permanent rescue fund in 2013, which might require some restructuring of privately held sovereign debt.

Reflecting this medium-term risk, Ireland's two-year and five-year paper are yielding close to 12 percent, more than its 10-year bonds on the secondary market.

At the end of March, the Irish government said the banks needed 24 billion euros to bulletproof their balance sheets but Dublin hopes some five billion euros can be raised from imposing losses on junior bondholders and asset sales, meaning that 19 billion euros of the 35 billion would be tapped.
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