Negotiations over Greece’s bailout took three steps forward on Friday —but two steps back on Monday.
It seems Greece—and much of the EMU—is bound and determined to not chart a straight path to a permanent bailout agreement. Friday, the EMU reached an agreement on how much of the burden private bondholders would share—something Germany has flip-flopped on numerous times. Most recently, Germany supported forced private sector responsibility, at odds with most eurozone nations. But last Friday, Germany agreed to back off , and now it seems their official position is for private creditors to participate on a “voluntary” basis, following the framework of 2009’s Vienna Initiative.
Under that plan, parent banks of Eastern European banking units vowed to maintain Eastern European debt exposure as regulators encouraged creditors to roll over maturing bonds. The new plan’s specifics aren’t yet hammered out, though it seemingly would effectively extend Greek debt securities’ maturities. Should this be their final decision, it would likely provide Greece and its creditors time to work through extant debt issues, perhaps avoiding an event that would trigger credit default swaps—a positive for Greece and for European banks.
But unification on one point isn’t blanket resolution. The agreement to disburse July’s funds took a detour Monday when EMU finance ministers, holding a “euro crisis” meeting, announced they won’t releasethe full €12 billion unless Greece’s parliament agrees on austerity and privatization of state-owned assets. This hard-line stance prompted an IMF warningthat failure to cooperate could have “large global spillovers.” No question, Greece not getting July aid (thus not making debt payments) wouldn’t be ideal and would signal serious disunity in the union—something markets won’t like. But neither of Monday’s proclamations is surprising. The EMU and IMF have the same goal: Keep the union intact and avoid Greek default. And both are using tough rhetoric to incite action, whether austerity or cooperation.
Still, some progress was made overall, and most likely, Greece gets its July money. The longer-term game plan? In all likelihood this cycle—delays, kerfuffles, political puffery and posturing and ultimately moving (sometimes last minute) to do what it takes to maintain the union—likely repeats over the next two years. Funding is there till 2013. And the EFSF’s existence shows EU ministers understand the need to gradually resolve Greece’s woes. Further, they’ve acknowledged post-2013 issues by agreeing to help Greece, Ireland and Portugal transition to open-market debt financing through the European Stability Mechanism, which will take effect in 2013.
Any back-and-forth now has been mostly politics—both intra- and internationally. Does Greece have the drive to push unpopular austerity? If not, will EU ministers front funds and/or force austerity? Key short-term questions, and maybe Tuesday’s Greek confidence vote will shed some light.
Greek politicians are essentially being forced to choose between their popularity and needed money while their eurozone creditors face the conundrum of handing needed money to Greece, but possibly losing popularity in the process. Ultimately, today’s issues aren’t impassable. But the political gamesmanship in Europe today is not doing anyone any real favors. With that said, a disorderly and sudden solution to the Greek debacle would likely cost eurozone politicians far more—in both popularity and money. (Even with the skeptical view we at Fisher Investments MarketMinder take of politicians, we believe they likely know that much.) So while a little posturing will likely occur, it seems likely politicians will eventually do what’s necessary to avoid a potentially greasier outcome.
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