G8 Summit ended with pledge to support growth and Greece

The four day G8 Summit closed out at Camp Davis on Saturday with world leaders coming down in support of growth and saving Greece from the current financial crisis. At the same time, the leaders of the world put the onus on their European counterparts to deal with the financial turmoil before it starts hurting the rest of the world economy.

British PM David Cameron called for “decisive action” and “contingency plan” to combat and tackle the eurozone crisis. He also delicately prodded that the European Central Bank (ECB) should consider printing notes to revive demand in the single currency block.

US President Barack Obama, the host of the Camp Davis Summit, called upon the leaders of France, Germany and Italy to resolve the crisis through restoring public finances and encouraging stimulus. Keeping an eye on his re-election chances, President Obama proposed “stimulus” for job-creating infrastructures, and balancing it with “reforms” in order to address debts and deficits.

Lastly, in order to address the political and economic upheaval in Greece, the leaders of the G8 nations also reaffirmed their interest in keeping Greece within the euro zone. Though, they didn’t propose any solution to tackle the turmoil in Greece.

Austerity talk postpones as Greece goes on strike

In a major development, the union members in Greece has threatened to go on a nation-wide, day-long strike on Tuesday. This includes members of civil servants as well as private-sector workers who are already frustrated by two years of austerity and are against more stringent reforms that will dent a bigger hole in their earnings. The strike has delayed Greek government’s attempt to reach a final decision on revised austerity plan to Wednesday. Incidentally, this is the second time that the government of Greece has failed to meet the deadline.

As Greece prepares for a long haul, its leaders are striving hard to strike a balance between reform demands (by its private eurozone creditors) and the need to retain public support, especially with the elections coming later in 2012. Greece is desperately seeking a second €130 billion rescue fund from its private International creditors to repay a € 14.4 billion bond redemption due in March.

The troika of private creditors to Greece, that includes IMF, ECB and the European Commission, are relentlessly pressing for increase in tax, further cut in spending and wage cuts. The new threat has rattled Greece’s middle class who are already facing the heat from closing down of businesses, high unemployment rate and severe money crunch.

Pressure mounts on Greece to step up austerity measures

In a bid to pacify foreign lenders, the government of Greece has agreed to new spending cuts on Sunday. Though this may not unlock €130 billion bail-out fund Greece desperately needs to stave off bankruptcy, but it has kept open dialogues to resume on Monday. The troika of foreign lenders that have mounted pressure on Greek government are the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF).

The announcement was made on Sunday after a five-hour long meeting led by Greek Premier Lucas Papademos along with leaders of three main parties. In the meeting it was decided to bring down Greek spending by 1.5 percent of GDP in 2012 through various such measures as wage cuts, reduction in supplemental pensions, cut in social security contributions and bank recapitalization plan, etc.

Though the leaders of coalition government have broadly agreed on new austerity measures, consensus has to be reached on finer points. The troika of foreign creditors has put forward a slew of demands in exchange for fresh release of €130 billion Greek rescue fund. Important among them are – public sector workforce to be reduced to 1,50,000, cut in supplemental pensions, wage cuts in private sectors, etc. With unemployment hovering at around 19 percent and the country already in recession, it is certainly not going to be easy for Greek government to push through more stringent economic policies.

Greece rebuffs Germany’s proposal of external budget monitoring

Germany’s proposal to create a “budget commissioner” to oversee tax and spending decisions evoked a strong reaction from Greek finance minister, Evangelos Venizelos. The minister dismissed the plan saying that it is not only improper but an insult to Greek pride.

The proposal was made in exchange for €130 billion help as second emergency package to Greece. The country is in dire need of this fund to repay its debts due on March 20. But if the proposed agreement is reached that would give direct control to European Institutions (IMF, ECB and EU). They would then have the right to oversee or intervene (through the budget commissioner), on major budgetary policy decisions in Greece for a certain period.

The problem erupted in the wake of fear that the €130-billion proposed package may not be enough to address the debt crisis. A latest analysis also revealed that the second bail-out package would require additional funds to bring down Greece’s debt to a manageable total by the year 2020.

With taxpayers in Europe already reeling under debt crisis, the need for additional funds is seen as the biggest hindrance to broker a deal between Greece and its private creditors. But the immediate biggest concern is if an agreement is not reached before March 20th deadline, Greece could be the first defaulter among developed nations in a very long time.

EU postpones its decision to save Greek government bonds

Fresh tension brewed in Europe when the three overseas money lenders (termed ‘troika’) deferred their plan to save Greek government bonds by writing off 50% of its debt. The decision was based on the inability of the Lucas Papademos’s interim government in implementing severe austerity measures in Greece, despite reaching an official agreement. The ‘troika’ included European officials representing the EU (European Union), the ECB (European Central Bank) and the IMF (International Monetary fund). They have cast a serious doubt on Greece’s ability and willingness to come out of debt crisis and may withhold the next aid installment due on March.

The situation further aggravated as negotiations between the Greek PM Lucas Papademos’s interim government and the Institute of International Finance (IIF) held on Friday met dead ends. The IIF that constituted members of private sector investors and banks had been engaged on a series of talks with the government on merits of accepting a “voluntarily” default in exchange for additional International aid. The intention was to force private holders of Greek government bonds to accept losses so as to bring down the country’s debt. But with the IIF officials backing out from absorbing losses, the possibility of uncontrolled Greek default is growing larger and so is its impact on Europe and other global economies.

ECB infuses $639 billion fresh credit into European banking system

In an unprecedented move on Wednesday, the European Central Bank (ECB) has made available fresh credit worth approximately $639 billion (equivalent to €489.191 billion) for a period of three years at, unbelievably low, one percent interest. The figure has surpassed economists’ expectation by around $231 billion. By providing cheap loans, ECB is trying to address the issue of “long-term refinancing operation” of European banks (due on first quarter of 2012) and liquidity crisis in the market.

The $639 billion credit aid is considered as the biggest loan given by the European Central Bank in 13 years since the introduction of ‘Euro’ as the shared currency. It is believed that with the availability of cheap loans, banks in Europe might be able to avoid the impending recession. Approximately 500 European banks have applied for long-term loans on Wednesday. Among these are banks of France and Spanish banks.

It is hoped that the availability of cheap loans (at one percent interest) from ECB may spike up interest to buy government securities (bonds), which could bring down governments’ borrowing cost. Or, it may drive commercial banks to invest part of their fund in private sector, which could spur sustainable economic growth in Europe. But whichever options they may take, ECB hopes that, such an action would boost up profit for the banks, initiate growth and ease up the debt crisis in Europe.