Friday, 23 April 2010

Greece asks EU to activate 30bn euro aid package

Greece has become the first eurozone economy to ask for an emergency financing package from the European Union and International Monetary Fund. The Greek government today officially asked  European partners to activate a 30 billion euro mechanism set up for the country a month ago.

Prime Minister Yiorgos Papandreou described the financial aid as “a national and urgent necessity”, a safe harbour in which Greece could rebuild its ship with sound and lasting materials. The government’s real goal, he said, was long-term reform of a flagging economy. But the country’s lack of credibility in money markets was sapping the time in which to carry this out.

Imminent reforms in social security and the labour market are already raising hackles. Greece suffered a triple whammy yesterday, resulting in the highest borrowing rates for the most beleaguered European economy in twelve years.

Eurostat, the European Union’s statistical agency, upwardly revised Greece’s 2009 deficit to 13.6 percent of GDP, almost a point above the previous estimate of 12.7 percent. That suggests that Greek efforts to reduce the deficit by four points this year will not set as promising a course as previously thought towards eliminating the deficit by 2013 as promised in the Stability and Growth Plan.

The second blow was a downward revision of Greek bonds from A2 to A3 by Moody’s Investment Service. Moody’s took Greek bonds down from A1 status only last November – a precipitous rate of decline.

The third blow to the economy was a one-day strike by an estimated half million public sector workers, that brought ministries to a standstill. Public universities and polytechnics barely opened, public hospitals operated on a skeleton staff, and passenger shipping workers walked off the job, bringing the main Athenian port of Piraieus to a complete standstill. Shipping workers are planning more one-day strikes next week. Civil aviation workers decided to stay on the job to help clear a backlog of travellers stranded on account of Icelandic volcanic smog-related travel restrictions.

Greek spreads on the ten-year bond rose to a high of 622 basis points, a rate not seen since 1998, four years before Greece adopted the euro, and were hovering at roughly 537 basis points as this post went online. That effectively put the rate at which Greece would have borrowed yesterday above 8 percent.

Greek policymakers believe that cost to be prohibitively high. Last week Prime Minister Yiorgos Papandreou asked the European Commission to explain the terms on which Greece might borrow some of the 30 billion euros its eurozone partners have earmarked as a financial safety net. The EU has promised a rate of 5 percent.

Yesterday’s strike was organised jointly by the civil servants’ union and the communist party to protest against an austerity plan announced in March. They want the government to restore bonuses axed from a million public sector workers, and to shore up social security rather than slashing it. The Government has recently said it will introduce legislation to lower its share of the cost of pensions, estimated to rise to a quarter of GDP by the middle of the century. The unions are also unhappy about legislation to telescope local governments from just over 1,000 to 366, resulting in about 15,000 layoffs of contract workers at the end of the year.

The General Confederation of Greek Workers, the country’s biggest umbrella grouping of private sector unions, is also unhappy with the path of austerity and reform. It says the official unemployment rate of 11.3 translates into a real unemployment rate of 17.5 percent once undeclared unemployment and underemployment are factored in.

See also:

Friday, 16 April 2010

Greece moves towards EU, IMF rescue

Greece yesterday requested the opening of talks on activation of a financial safety net created at its behest last month by eurozone partners in collaboration with the International Monetary Fund. The move came after a dramatic rise in Greek bond spreads that peaked at 426 basis points, coming dangerously close to the historic high of more than 450 points reached on April 6. Greece had evidently hoped that the very existence of the safety net would guarantee it against default on existing loans, and encourage markets to refinance its debt at viable rates. But upward market pressure continued even after eurozone partners and the IMF announced specific pledges to the plan amounting to 45 billion euros this year.
Greek request:
Bond plunge:
Pledges on April 11:

Social security cuts imminent
A Greek government plan will cut top ups to pensions over 1,400 euros as soon as this November, and limit basic pensions to under 360 euros a month by 2018, reveals a Greek newspaper today.
In other details leaked by Kathimerini, which is in apparent possession of a version of a bill to be presented to European finance ministers on April 26, top pensions may come down by as much as 20 percent.

Police deal blow to terrorists
Greek police may have dealt a death blow to the group Revolutionary Struggle, beginning with the arrest of six suspected members several days ago. This week they recovered what they believe to be the organisation's main computer, detailing 13 operations involving high explosive, targets that include politicians, journalists and businesspeople, and a vehicle belonging to one of the six. Police also recovered more than 100,000 euros in cash, two pistols and fake identity cards.

Monday, 12 April 2010

Eurozone earmarks 30bn for Greece

Greece's fellow Eurogroup members on Sunday pledged 30 billion euros for a financial rescue package for the beleaguered nation, should it be needed. A further 15 billion euros are earmarked by the International Monetary Fund, media say. The European money would be disbursed at 5 percent, slightly above the IMF's lending rate.

It is the first time that the rescue package, under discussion since early Febraury, has been accompanied by specific figures.Greece stressed that it has not yet asked for the activation of the rescue plan, and feels that its mere existence with specifics is enough to calm money market fears enough to allow Greece to borrow viably.

The news seemed on Monday to have lowered Greek bond spreads with the German bond (spreads for the 10-year bond stood at 343 basis points at the time of this posting, down from a high of 456 basis points last week, which would have led to borrowing rates of about 7.5 percent). The Athens Exchnage rallied 3.5 percent and the euro also rallied on Monday.

Financial Times:

Sunday, 11 April 2010

Greece poised to ask for IMF, EU money

Greece is poised to ask for financial assistance from the International Monetary Fund or the European Union within days, possibly hours, Greek and international media report. Greek Prime Minister Yiorgos Papandreou on Thursday asked the European Council of government leaders to finalise the details of a eurozone rescue package as quickly as possible. The leaders of the Eurogroup on Saturday held a teleconference to finalise technical aspects of how a bilateral loan system from other EU members to Greece would work, and with what interest rates. Reuters allegedly quotes a senior EU diplomat as quoting 5 percent, which is far below the current rate Greece pays on the market.

The interest rate has been a focal point of the European debate, because it determines the extent to which countries will be encouraged to fall back on EU government-to-government money, broadening the redistribution of wealth between member states, rather than facing the harsher judment of the markets. The Financial Times reported that "Germany was sticking to its demand that the eurozone portion of the loans would have to be made at or near Greek market rates." But on Saturday an official told Bloomberg that "Germany is prepared to give Greece loans at below-market interest rates, dropping its opposition to aid subsidies," as long as the rate remains above that of the IMF. The March 25 announcement of the bilateral loan facility for Greece said the loans would be "non-concessional".

The imminence of Greece's request is due to the fact that its borrowing rates rose to record rates on Tuesday and Thursday last week. As this post went to air, spreads between the German and Greek bonds stood at 393 basis points - almost four percentage points. The urgency to the Eurogroup stems from pressure on the euro resulting from fear of a Greek default on servicing its existing loans. Whereas the euro rallied on Friday following market interest in the aid package for Greece becoming reality, Bloomberg financial agency reports on an almost 11-month low for the euro against the dollar yesterday. Fitch's rating agency on Friday cut Greece's credit rating from BBB+ to BBB-, only one level above junk.

Greece needs 10-12 billion euros in new loans during May to refinance itself, according to the Economist. Finance Minister Yiorgos Papakonstantinou is to undertake a roadshow in the US during the last ten days of April to raise most of that money. Failing to do so, some analysts think, Greece will certainly need to ask for IMF and EU assistance then.

The Greek government is also to accelerate its timeframe for the structural reform of the economy. According to media reports, it will bring forward the reform of social security, privatisations and use of public property, the opening up of closed professions, the simplification of the procedure to open a business and reduction of bureaucracy, and the telescoping of the country's system of local government from over a thousand municipalities to 366, with an equivalent reduction in prefectures. This will effectively dismiss 15,000 contract workers, by some estimates, and save 1.8 billion euros a year.

The new timeframe was announced by Papandreou in an interview to the Sunday edition of To Vima. "I think the time has come to open up all the fronts," he said. "because I believe that we must do things now so that they will have an effect after two or three years."

Mega TV on local government:
Bloomberg on the falling euro: "April 10 (Bloomberg) -- The euro dropped to within one cent of an 11-month low against the dollar this week as rising yields on Greece’s debt fueled speculation the nation would default, damping investor appetite for the European currency."
Bloomberg on German aid terms:
Financial Times on the rescue package:
The Economist analysis:

Comment: How Germany drives Greece to default
Paul Krugman's NYT blog opens with this analysis on April 8: "The debt crisis in Greece is approaching the point of no return. As prospects for a rescue plan seem to be fading, largely thanks to German obduracy, nervous investors have driven interest rates on Greek government bonds sky-high, sharply raising the country’s borrowing costs. This will push Greece even deeper into debt, further undermining confidence. At this point it’s hard to see how the nation can escape from this death spiral into default."

Tuesday, 6 April 2010

Is the EU safety net helping Greece?
The interest paid by Greece to finance its debt continues to rise, despite a European Union credit safety net announced on March 25. Today, the Financial Times reports, its spread with the Germand bond rose to four percentage points, the highest ever. Greece reached a peak interest rate of 7.16 percent on its ten-year bond. The FT also reports that Eurostat will report a slightly higher-than-predicted Greek deficit of over 13 percent for 2009, further undermining the government's credibility. Greece has covered its borrowing requirements for April, but needs another 10bn euros in May. It may seek to raise that through a bond issue to US investors, says the FT.

Financial commentators have pointed out that the EU safety net is not reassuring to investors, because a) it does not reduce Greece's cost of borrowing but insists on roughly market rates, and b) is not activated until Greece has been rejected by markets, and even then only with unanimous eurozone approval.
Record highs:
US sale:
NYT blog by Paul Taylor:

Comment: The real crisis is lack of demand
The FT's Martin Wolf argues that Germany is being dishonest about wanting smaller fiscal deficits from its EU partners, such as Greece. Were Greece, Spain, Portugal, Ireland and others to tighten their public finances, they would deliver such a shock to their private sectors that demand for German products would be as low in the European periphery as it is in Germany itself. The European Central Bank, Wolf argues, contributed to fiscal profligacy with its incentive interest rates, determined partly in order to stimulate demand on Germany's behalf. The argument is subversive, courageous and, if correct, truly worrying. If public and private economic discipline, hard work, environmental conscientiousness and an avoidance of acquiring stuff you do not need (the German way of life) lead your economic model to a dead end because it depends on spendthrift, materialistic societies, what hope is there for capitalism?

Video shows US killing of Reuters employees
A military video showing a US Apache helicopter firing upon and killing a Reuters photographer and driver in Iraq in 2007 has been released on the web. Reuters had been pressing unsuccessfully for a release of the video under the Freedom of Information Act.