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Greece’s bailout plans are up in the air again. Two German ‘bad banks’ that hold $12.3 billion in Greek debt, may not participate in the second Greek bailout. And recently the Greek government demanded 90% participation from the private sector to go ahead with bond swaps that are crucial to the success of the bailout agreement.In a report Société Générale analyst Michel Martinez points out three obstacles to the Greek bailout but points out that they can be overcome. Here’s how…
Greece recently set a 90% private sector involvement (PSI) target but Martinez says the Greek government is unlikely to cancel PSI, and that a rate slightly lower than 90% would not sink the new bailout. The European plan has a buffer since €20 billion is set aside for debt buybacks and €35 billion to cover the cost of PSI credit. If PSI doesn’t meet the 90% target then these amounts can be reallocated to cover the financing gap.
Martinez also also says, while Greece and Finland agreed to a cash collateral deal, Finland is contributing a tiny €1.5 billion contribution to the total €109 billion. If extended to other countries the deal will likely fail. Martinez says: “In our opinion, a ‘suitable collateral solution’ will be found. Theoretically, there is also the possibility that Finland steps out of the package for Greece.”
Recently, Greece’s finance minister Evangelos Venizelos said the debt stricken nation is likely to miss budget targets set out by the EU and IMF. But Martinez argues that the EU and IMF will likely accept this, because of deteriorating economic conditions and volatility in financial markets. Instead Greece should barrel ahead with structural reforms and beef up tax collection which will be crucial to disbursement of future tranches of loans.