Threat of Greek default fades but bailout may not be last

AFP, Sunday 11 Mar 2012

The recent bond swap for Greece may have eased worries, but the country is not out of the woods yet

The dark clouds hanging over the eurozone have receded along with the threat of a Greek default, but the latest bailout for Athens may not be the last.

After nine long months of negotiations, a large majority of Greece's private creditors agreed to a bond swap that will see them accept huge losses and wipe some 100 billion euros ($131 billion) off Athens' debt.

Eurozone finance ministers immediately unblocked part of a second aid package of 130 billion euros and were expected to give final approval to the entire programme at a Monday meeting.

International Monetary Fund chief Christine Lagarde welcomed the debt deal as "an important step that will dramatically reduce Greece's medium-term financing needs and contribute to debt sustainability".

And US Treasury Secretary Timothy Geithner said that thanks to the measures taken by Europe to tamp down the debt crisis, the continent no longer posed major risks to the global economy.

"We are not out of the woods but we have taken an important big step," German Finance Minister Wolfgang Schaeuble said.

The comments highlighted that the worst-case scenario -- the debt crisis spreading to the rest of the world -- was no longer expected.

The swap, which was taken up by 83.5 per cent of Greece's private creditors, was a key condition for the bailout to go forward, with the Greek parliament having already approved further spending cuts and reforms to liberalise the economy.

European leaders are now waiting for the International Monetary Fund to say how much it will contribute to the second aid programme.

Even within the 17-member eurozone another spike in the financial crisis was seen as unlikely and contagion of Greece's endebted neighbours as less probable.

Still, the second bailout which covers the period to the end of 2014 leaves Greece fragile and Athens may need to soon ask for more aid, diplomats warned.

Basing itself on a joint report by the EU, the European Central Bank and the IMF, the German news magazine Der Spiegel said Greece may need 50 billion euros in 2015.

A preliminary version of the latest report by the troika of EU, ECB and IMF did not expect Greece to return to the bond markets in 2015. However, Greece may need up to 50 billion euros between 2015 and 2020, and could be struggling to find the funds.

Schaeuble on Sunday noted that the second bailout may not be enough in the long run, an admission already made to German lawmakers last month.

"Nobody can rule out that Greece will not need a third package, I spoke in parliament about that completely frankly," he told Greece's To Vima daily.

"But now is not the time to discuss a third package, it is the time to implement the second package," he said.

Eurogroup head Jean-Claude Juncker has said in an interview last month that a third aid package may not be totally ruled out but added "...we should not have as a starting assumption that a third programme will be" needed.

Along the same line, a European government source said that a third package "seems quite logical" as there was only a small chance for Greece to return to the markets.
But more aid will be less of a problem as the amount of money needed will not be the same, the source added.

The debt swap was aimed to reduce Greek debt to a sustainable level of about 120 per cent of gross domestic product (GDP) by 2020, against 160 per cent now.

But experts see even that reduced level as far too optimistic in a deteriorating economic environment.

"Weak business and consumer sentiment, a rapidly rising unemployment rate and scarce credit all suggest that the economy is likely to continue to contract sharply this year," said economist Ben May from Capital Economics.

"By contrast, the troika seems to think that the recession is almost over. What's more, we think that real GDP and inflation will be weaker than the troika assumes in the medium term."

The latest data released Friday showed the Greek economy shrank by a worse than expected 7.5 per cent in the fourth quarter of 2011.

Based on the quarterly figures given, the Greek economy shrank by 6.9 per cent in 2011.

The economy was initially expected to shrink by 5.5 per cent in 2011 and by 2.8 per cent this year, according to budget forecasts.

Eurozone finance ministers will have little time to catch their breath after approving the Greek rescue package on Monday, with sources saying they are likely to address the sharply higher budget deficit in Spain.

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