Markets are rallying in the wake of Greek parliamentary approval for a new round of austerity measures that would trim €325 million ($430 million) from the government’s 2013 budget, reduce minimum wage by 20%, cut 15,000 public sector jobs, and draw down medical spending and benefits from pension funds.However, the real hurdle is still ahead for the disbursement of Greece’s second bailout—private sector involvement.
Negotiations between Greece and its private sector creditors have been going on for months now, with little progress to be shown for those endeavours. Deadlines for the deal and bond swap to be finalised have repeatedly been pushed back—most recently to sometime late this week.
The problem is not actually the deal itself; after a significant amount of brinkmanship, creditors and the government are likely to reach an agreement. It’s the fact that representatives of the banking sector do not necessarily speak for all, or even a strong majority of, bondholders.
This wouldn’t be a problem if EU leaders were willing to allow a credit event to occur and credit default swaps—insurance contracts on bond holdings—to be paid out. However, rightly or wrongly they appear intent on avoiding that, which means they’re going to have to forcefully coerce bondholders to participate in a way that is still “voluntary.”
The predicament here is that the medicine is probably worse than the disease—if EU leaders pull a high-handed manoeuvre to avoid a credit event, then they likely discredit the entire CDS industry—not just the relatively small, already marked-to-market Greek one.
If the bond swap doesn’t happen, however, this will jeopardize the premise for EU bailout funds in the first place. Greece will experience a disorderly default, and it’s unclear whether the country would remain in the euro.
Greece has a March 6 deadline for the bond swap to actually take place. After that, it has to receive bailout funds by March 27 to pay off €14.4 billion ($19 billion) in debts that mature on March 20 (there’s a seven day grace period).
This is the real obstacle ahead of EU leaders and one we’re likely to see play out in the coming few weeks.