IMF Chief Lagarde cautions against Greek exit fallout

Following Greek President Carolos Papoulias's decision to nominate a judge as the head of the interim government, the chief of International Monetary Fund (IMF) until the upcoming election, Christine Lagarde, called on prominent Greek leaders to show their commitment to stay with the euro zone on Wednesday. She stressed on the importance of sticking to the bailout agreement – not just for Greece’s own financial and political security but also for the entire euro zone. She also pointed out the possible consequences of such exit – which would be “hard and expensive, and not just for Greece”. Greece is set for a repeat general election on June 17.

What is adding to the fear and speculation in Europe is the rising popularity of political parties in Greece who are against European Union-IMF bailout deal. In the event that an anti-bailout party comes to power following the election, there is a chance that the bail-out deal might come apart and Greece would exit from euro zone.  There is also a fear of its cascading effect on other bigger but vulnerable economies in Europe, especially Spain and Italy.

Top EU officials have already warned Greece that complying with the terms of the bailout package is mandatory in order to receive international monetary aid.

Proposed Greek bond swap finally gets creditors approval

Finally, the Greek debt restructuring program cleared its last hurdle on Friday after private bond holders agreed to exchange their existing old bonds for new securities. This clears the way for Greece to receive €130 billion in bail-out package from the International Monetary Fund (IMF) and European Union (EU).

The proposed new deal has found favor with 85% of the private holders of Greek bonds whose net worth is € 172 billion in bond amount. The rest 15 percent (equivalent to €25 billion) would be swept up through collective-action clauses. Together, these would add up to € 197 billion out of the total € 206 billion. The latest bond-swap deal expects its private bond holders to accept financial loss that could go as high as 75 percent.

The Greek debt restructuring program is supposed to bring some measure of relief for the participating investors. It is reported that about 15 percent of their holdings would be in good, short-term bonds and 31.5% in upcoming Greek bonds with 11 to 30 years of maturity period. In addition, they would also receive Greece GDP-growth linked security. This doesn’t look much encouraging considering Greece’s current financial woes.

For Greece, besides bringing down the public debt amount, the new bond swap would also reduce its yearly interest burden, starting this year. Last year, the interest itself was as high as €16.4 billion.

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.

Is global recession imminent?

In the midst of market uncertainty coupled with sluggish economic growth, few had expected robust beginning to this New Year. But few had actually anticipated or openly admitted that attempts to bring global economy back on track could be numbered. That Eurozone has approached ‘a perilous new phase,’ acknowledged by none other than the International Monetary Fund (IMF) on Tuesday has certainly given it credibility. But hasn’t the threat of global recession been on the cards for some time now?

The bleak prediction by International Monetary Fund is based on two prevailing situations – high financing cost borne by euro zone nations and European banks facing severe credit crunch. Experts are of the opinion that each of the two conditions could have triggering effect on the other and may lead to further economic contractions.

Factors outside Eurozone could also have a large impact on global economy. Important among them are hike in global oil price due to sanctions on Iran, investor fear in the prevailing market scenario or possibility of spill-over effect of European debt crisis on other big economies like the United States as well as emerging economies like Japan.

On its quarterly updates, IMF has scaled down its previous global growth estimates of the year 2012 from 4 percent to 3.25 percent. In her latest speech, Managing Director of IMF, Christine Lagarde, has called on all the nations of the world to help bolster the bail-out fund and combat the threat of global recession. Currently, the fund is seeking $500 billion in addition to its present reserve.

Greece debt talk suffers a fresh setback

The ongoing negotiation between the government of Greece and the IIF (Institute of International Finance that includes representatives of private banks and investors) has come to a standstill over debt talk. The bone of contention is a fresh demand that Germany and the IMF (International Monetary Fund) is trying to clamp on private creditors of Greek government bonds. As both sides are refusing to budge from their positions, the issue of Greece’s outstanding debt remains unanswered.

Under the new demand, private bondholders are expected to accept lower interest rates on their Greek bonds. Plus, they are supposed to swap their existing bonds with new 30-year bonds with below 4 percent interest rate. Experts are of the opinion that for private investors this could amount to 60%-70% loss on Greek bonds.

An agreement on debt talk was expected to be reached by this Monday. The intention was to give lenders to Greece enough time to arrange for second rescue package of €130 billion prior to EU’s next Summit scheduled on January 30. With participation of private creditors mandatory for receiving further financial aid, the latest setback has cast a doubt on how Greece would come up with €14.5 billion debt repayment on 20th March.

Finding a solution to the latest crisis is important for leaders of EU. This would not only bring down Greece debt on a sustainable path, but would also have a positive impact on eurozone nations as a whole.

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.