Why are Americans and the rest of Europe bailing out Greece?

Greece owes about $330 Billion Euros (about $472 billion dollars). Well, according to the European Central Bank, "The Greek government has shares in listed companies, it owns real estate. Experts estimate the sales potential (from privatizations) at up to 300 billion euros ($429.5 billion)." This is going to be a big week for Greece: "Greece stands on the brink of crisis as European officials prepare for a week of crucial meetings to avert economic collapse." Reuters has this story:

EU officials have asked Athens to step up privatizations urgently and suggested setting up a trustee institution to help oversee the process, similar to the body that privatized East German companies after the fall of communism. . . .

The fund's European department director, Antonio Borges, said earlier this month the 50 billion euros cited as a figure for proceeds represented "probably less than 20 percent of all the assets the Greeks could privatize. . . .

The speed with which conditions are deteriorating is really quite incredible. What was supposed to be a three year plan last year to solve the problem has lasted just one year. The Xinhua news agency reports that the Finance Ministry claims that without new changes: "the sovereign debt will reach 501 billion euros (728.1 billion dollars) or 198 percent of GDP in 2015."

Greek unions are fiercely against any privatization moves, and the Socialist Party obviously has close ties to the unions that it doesn't want to upset any more than necessary. Of course, the reason that unions fear privatization is that it will increase efficiency in the entire economy.

As a Socialist elected with union support, Mr. Papandreou also faces resistance to the privatization of state assets, slated to be part of the next round of austerity measures.

Greece’s public power company union has called for rolling power cutoffs starting Monday to protest the government’s plan to sell 17 percent of the state’s stake in the Public Power Corporation, which is listed on the Athens stock exchange.

Costas Koutsodimas, the vice president of the union, known as Genop, called the plan a win for the banks and a loss to Greek patrimony, questioning how selling state assets, perhaps to foreign utilities that are reportedly interested in buying stakes, would be good for Greece. . . .

USA Today reports today that: "Protesters who flock each afternoon to Athens' central Syntagma square in front of parliament have been wearing stickers saying 'We owe nothing, we'll sell nothing, we'll pay nothing' — rejecting creditors' demands to sell off state assets." The Greek government is considering selling off: "public utilities - electricity, water, railways, and the docks." A recent WSJ piece lists some things that the government is agreeing to sell and they include: "the government's stake in the Mont Parnes Casino resort in Athens, hotels, and even a concession to develop a luxury resort with a world-class golf course on the island of Rhodes." Of the 75,000 government owned properties, the government is preparing to sell some 20 to 30 properties, the first of which may be available in a few months. "Most of the public real estate is undeveloped land or retired sites such as the old Athens airport at Hellenikon." But the government can't even bring itself to sell most of this land outright, instead pushing to make "long-tern leases of 30 to 40 years." why should the government be running or owning any of those items anyway?

The Economist magazine writes: "Greece has not complied with its obligation to its EU/IMF rescuers, notably in its failure to privatise state assets." The New York Times notes: "doubts have emerged about the government’s ability to implement and enforce the measures it has already passed." The Economist summarized a lot of the problems in one sentence: "The fact that it has come back to ask for more money just a year after being bailed out infuriates Germans, who feel they are being asked to throw good money after bad." Last year's bailout package was supposed to last for three years. Now they are back trying to rescue Greece with more money just one year later. Greece doesn't want to do what it has to do to fix things and possibly they don't feel that they have to since other countries are going to give them money. So why should other countries give Greece even more money? Finland's election this April turned in part on opposition to these types of bailouts. The True Finns party scored a solid third place in the April 2011 elections as a result of their opposition to these loans, though after months of haggling six other parties banded together across the political spectrum to keep True Finns out of the government. Of course, the conservative German parties have also been badly hurt at the polls for their past support for these bailouts.

Even the current Socialist government in Greece talks about its civil service as being "bloated," that they think that it can be cut by over 21 percent. The Wall Street Journal reports: "Never mind that Greece has not upheld its end of the bargain—spending is up over last year, and tax receipts are down, the opposite of what was promised. . . . The bailouts will give Greece enough cash to cover its current deficits, but not enough to pay off creditors whose bonds are coming due." But of course, Portugal and Ireland are in similar situations: "Portugal and Ireland are only avoiding default because of a flow of bailout cash, but have no prospect of repaying their outstanding loans."

So while plans have been floated to force private bond holders to write off a part of their bond holdings, Greece could pay off the debt if they want. The country seems in no mood for any other type of belt tightening. "With Athens erupting into violence last week as tens of thousands of protesters marched on parliament, it became clear that the prospect of further belt-tightening is a line few are willing to cross.' Note that in just a month the amount owed by Greece has gone from €330bn to €347bn.

Under Schaeuble’s plan, an estimated €270bn of Greece’s €347bn of sovereign debt would be restructured — meaning bondholders would have to mark down the value of their holdings. . . .

One disaster after another has been predicted if the different bailouts weren't carried out. Alan Greenspan, former Federal Reserve chairman, says: “The chances of Greece not defaulting are very small.” He believes that the chances of Greece defaulting are “so high that you almost have to say there’s no way out,” and that may leave some U.S. banks “up against the wall.” He believes that it has the "potential to push the U.S. into another recession."

Moody's threatens to cut Italy's credit rating in the next 90 days on worries that Greece's credit crisis may drive euro-zone interest rates higher.

While they don't talk about selling off assets, some useful points in a recent WSJ op-ed.

If Greece defaults, then important French and German banks will be in deep trouble. Even a small rescheduling would force the banks to admit their losses. . . . .

The banks have really already born this loss. Bond prices have plummeted as the interest rate that Greece is having to pay has soared. Restructuring would force the banks to actually write down that loss.

Greece is not being bailed out. Greece's bondholders are being bailed out. Greece would rather default. Cleared of its debts, it would likely be able to borrow again soon.

Financial markets have figured this out. As of yesterday, it cost $182 per year to insure $1,000 five-year Greek debt, implying a 63% probability of total loss in five years. Yes, the write-down is inevitable.

Second, European banks are holding the bag. This week the Moody's rating agency put three large French banks under review for a potential downgrade because of their Greek exposure. Beyond direct exposure, banks throughout Europe lend to each other and write insurance against sovereign defaults. Even U.S. prime money market funds are indirectly exposed. . . .

Third, the European Central Bank (ECB) is now involved as well. It started buying secondary-market Greek debt last May. The ECB has now lent in excess of 80 billion euros to Greek banks, replacing private funding that has run away, and typically receiving Greek government debt as collateral.

If there is even a minor credit event, the ECB could no longer legally take that collateral. If Greece defaults and Greek banks fail, the ECB is stuck with junk collateral. This explains why ECB President Jean Claude Trichet insists that there must be "no credit event, no selective default."

Fourth, in the end this is all about Ireland, Portugal, Spain and Italy. If Greece were the only country in trouble, it would have been allowed to default. . . .

Greece cannot possibly pay 17% interest rates for 10 years. . . . .

Question: How much of this trouble faced by European banks results from them buying Greece's bonds to keep their governments happy?

A time line of events in the Greek bailout are available here.

Finally, here is something that the Washington Post put together last year.

Greek government workers have received what are called "13th- and 14th-month salaries." That means they work for 12 months, but get paid for 14. Sweet deal, if it doesn't wreck your economy. Oh, wait. It does. So, Greece's back-breaking concession to get the European bailout is not to actually eliminate the 13th- and 14th-month salaries. Oh, no: These will not be Draconian cuts, despite the fact that Draco was Athens's original lawgiver -- they will merely be capped at a flat rate. Henceforth, government workers will get a flat 250 euro ($331) Easter bonus, a 500 euro ($662) Christmas bonus and an additional 250 euro "subsidy leave."
Under the bailout, Greeks must now work until they are 67 years old. Up until now, they have been able to retire with pensions at -- take a guess -- 65? Nope. 62? Lower. 57? Keep going! 53? Bingo! . . .

UPDATE: The latest on the negotiations can be found in a WSJ article here. The US is obviously involved in paying more money this time.

European finance ministers meeting Sunday in Luxembourg moved toward approving a fresh quarterly installment of Greece's €110 billion ($157 billion) bailout loan, but they remained divided over the details of a far harder task—extending Greece a giant new package that would support it for years to come. . . .

Group of Seven industrialized countries held a conference call late Sunday to discuss the crisis, according to people familiar with the matter. Natalie Wyeth, a spokeswoman for the U.S. Treasury Department, confirmed a G-7 conference call was held but declined to provide any details.

In Athens, Prime Minister George Papandreou said his country was negotiating a new deal of roughly the same size as the one granted just last year—about another €100 billion—and urged his parliament to back him in a vote of confidence scheduled for Tuesday. . . .



Blogger Mark said...

Great summary John! Amazing that the Greeks in charge ever let all this happen. Who could possibly have believed this wouldn't end in disaster???

6/19/2011 11:30 AM  

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