Photo: AP/Nikolas Glakoumidis
European markets have been rallying on reports that Greece is closer to a bailout deal. Italian prime minister Mario Monti’s office said that European officials could arrive at a consensus on Greece at Monday’s Eurogroup meeting .This came after a conference call with German chancellor Angela Merkel and Greek prime minister Lucas Papademos.
But there are strong conditions attached to the new bailout, namely:
- Funds are paid into an escrow account, that always has enough cash to pay Greece’s debt for nine to 12 months.
- Athens would also have to agree to permanent and enhanced presence of international monitors.
- Greece meet a list of ’24 prior actions’ before the end of the month.
If all goes well at the Eurogroup meeting on Monday, it would pave the way for private sector investment (PSI) bond swap on Wednesday, with creditors getting 10 days to accept the offer. The swap should then be completed a week before Greece’s €14.5 billion euro debt repayment is due on March 20.
What’s the problem?
While Greece has said that it has met all the conditions to secure its second bailout which will clear the way for the (PSI) debt swap, it could require European governments to approve funds to back it. But, Societe Generale analysts James Nixon, Brian Jones and Klaus Baader are concerned that some countries will take a hard line and suggest putting it off till after Greek elections in April.
They argue that many European countries now think that contagion risks from a Greek default are manageable have become almost indifferent.
And there is the question of bond redemptions that are excluded from the debt swap:
“It also remains uncertain how the bailout package will finance the redemptions of bonds excluded from the PSI debt swap, especially those purchased by the ECB under its Securities Market Program. This led the Dutch finance minister to indicate that Greece may still have not passed the debt sustainability analysis and that consequently greater haircuts on private sector holdings of Greek debt may still need to be considered.
…For the second time in as many weeks, the risk is that Greece’s political leaders haul themselves all the way to Brussels clutching what they hope will be a final agreement only to be very publicly disappointed again.