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After the Haircut, What Next for Greece?

ATHENS –  The signs are all there that investors have really given up on Greece: analysts no longer say “if” when talking about the prospect of a default, but “when,” and Luxembourg’s Prime Minister Jean-Claude Juncker, the head of the Eurozone, the 17 countries who use the euro as a currency has acknowledged that losses for banks and institutions who’ve put their money into Greece could be as high as 60 percent.
Greek banks have a 30 percent exposure to Greek bonds and debts, and face possible collapse or nationalization under the worst case scenario as the Eurozone scrambles to see whether to give Greece a second bailout of $157 billion, in which investors agreed to take a 21 percent buzz cut. The first bailout, for $152 billion, failed because the pay cuts, tax hikes, slashed pensions, and layoffs demanded by the Troika of the European Union-International Monetary Fund-European Central Bank created a deep recession of 16 percent unemployment and the closing of 100,000 businesses as Greeks, scared out of their socks, stopped spending.
Without at least a 50 percent haircut, the second bailout could swell to as much as $350 billion or even an astronomical $600 billion, more than the total reserves of the European Financial Stability Facility (EFSF), leading Jans Weidmann, President of Germany’s Bundesbank, to say even if investors write off half their losses or more it would not help Greece and could even be dangerous if the country stopped trying to reduce its $460 billion – and climbing – debt.  “A haircut is not an cure-all,” Weidmann told Sunday’s Bild am Sonntag newspaper. “If it were to lead to a reduction in the readiness to implement structural reforms, it could even be dangerous.”

Greek Health Minister Andreas Loverdos says pension funds will be safe if Greece partially defaults but analysts don't agree

That came before the scheduled Oct. 26 EU Summit in Brussels and as Greek Finance Minister Evangelos Venizelos suggested the EU wants the Greek Parliament to give a 180-vote mandate in support of the second bailout – and its attached austerity measures. So far, Prime Minister George Papandreou has only been able to count on the 154 votes of his PASOK Socialist party, although one Member of Parliament in the party, former minister Louka Katseli, was tossed out after she voted against one measure in the last bill, so getting 26 more votes seems unlikely and lead to snap elections, analysts said.
Weidmann warned against letting highly indebted countries off the hook. “The basis for confidence in government bonds is that states can service their debts,” he said. “We cannot allow states with debts to have an easy way out of the problems they created for themselves. That would be an invitation to others to be copycats and the crisis of confidence would only grow,” he said, although adding he was not in principle opposed to helping out highly indebted nations.
“In a crisis like this I consider it to be right to help countries and buy them time if they take on their problems with determination and resolution,” he said. “They have got to get their state budgets in order and improve their competitiveness. Greece has to implement the adjustment program already agreed.”
The big problem for Greece is that the haircut has to be voluntarily accepted by banks and investors or ratings agencies will declare a default. The country is already bankrupt as it’s depending on the bailouts to keep paying its workers and pensioners but a default caused by an involuntary haircut could make it nearly impossible to borrow money in the open markets. Even now, Greek two-year bonds are requiring the state to pay as much as usurious 70 percent interest rates. The country could get a better deal from the Mafia.
Banks, through the Troika, lent money to Greece because of those high returns, but those could evaporate with a big haircut and some analysts have even suggested Greece will outright default on 100 percent of its debts, freeing the country of its burden but making it an international pariah with consequences that could even bring down the Eurozone and cause the euro to collapse. No one knows because it’s never happened before so it’s a game of economic speculation.
Ironically, the EU, IMF, and ECB could escape much of the anguish that will be caused to private banks who ponied up the money to help Greece, even though the political leaders have been blasted for failing to keep up with the crisis and offering half-solutions that have failed while Papandreou kept spinning the story that Greece would survive despite the mathematics showing that was impossible. A crushing blow came when the Troika this week produced a report showing that without a haircut of 50 percent that Greece’s debt-to-Gross Domestic Product ratio would surpass an unprecedented 180 percent of the next two years and still be 130 percent 20 years from now.
When Argentina defaulted 10 years ago, it caused a run on the banks and the collapse of the economy and kept the country out of the markets until reforms were instituted. Argentina went under with a deficit of 3.2 percent – Greece’s is still above 10 percent and the South American country’s debt-to-GDP ratio was 54 percent, nearly three times less than Greece’s.
Under the radar in Greece there are already building fears of a bank collapse that could be caused by what the haircut would do to Greek banks and some people are shifting their money to banks outside the country while others are quietly buying up non-perishables in supermarkets, fearful of a food shortage.And while Argentina could devalue its currency, Greece, as a member of the Eurozone, is stuck with the currency it adopted 10 years ago after lying about its economic statistics to get into the club – unless it returns to the drachma, which could set off a whole host of other problems.
The haircut, as the newspaper Kathimerini noted, will apply to two-thirds of the country’s debt and the breakdown for investors shows 16 percent is with the ECB, 5 percent with the IMF and 14 percent borrowed through bilateral loans. None of that will be written down as the haircut will apply to the remaining $175 billion is held by international markets, including 21 percent in Greek and Cypriot banks and $36.14 billion in other Greek institutions, mostly pension funds.
According to the Swiss bank UBS, the 50 percent haircut being proposed amounts to just a 22 percent reduction on the total of Greece’s outstanding debt. It is hardly the rescue that some might believe and an attempt is being made to appease private investors by issuing them with new bonds that would be governed by UK law rather than Greek legislation, which would hamper any future restructuring efforts. Despite its drawbacks, this is the best deal that the timorous Greek government and the ponderous Europeans have managed to haul onto the negotiating table. Athens will have little choice but to accept it as long as the investors will agree to a voluntary reduction.
A 50 percent haircut means Greek banks will have to be rescued by the government – although exactly how is unsure since the bailout money isn’t available and that’s what will cause the haircut in the first place. Greek pension funds will lose about $16.6 billon, making pensioners who have already had their pensions cut under austerity measures anxious about what will happen to them next, especially as they, like other Greeks, struggle to pay a raft of new “emergency taxes” while tax evaders costing the country nearly $40 billion a year have gone almost untouched. Each time unemployment rises by 1 percent, the pension funds lose about $695 million in contributions, Kathimerini noted. Speaking to Skai TV, economics Professor and labor expert Savvas Robolis said that the funds are also missing out on about $4.86 billion a year in revenues because of an avalanche of people who retired instead of working for a reduced pay at the same amount. There is also an estimated of the rush of people opting for retirement since 2009.
Added to that is another $2 billion per year in contributions that are lost because of undeclared work. Robolis said that the haircut would most probably lead to the Greek pension system having to be overhauled as it will not have enough money to meet retirement payments. Pensions have been slashed twice over the last two years, so the average is now about $1,112 per month. The government may have to inject some $55.6 billion into the banks to save them but doesn’t have the cash to do it. Health Minister Andreas Loverdos denied, however, that the pension funds would be affected although he didn’t explain why not.
Greek banks, several of which have previously failed EU “stress tests” are already feeling the pinch of speculation. In trading this week, Attica Bank lost 24.9 percent, Eurobank, notorious for imposing penalties on lenders who paid their loans but didn’t ask for a letter of discharge, lost 20.3 percent and Alpha Bank, set to merge with Eurobank, lost 19.4 percent. A big  haircut would create huge losses for the banks, which are forced to hold Greek government bonds by liquidity regulations.
(Sources: Kathimerini, Irish Times, City A.M.,  Reuters, Dow Jones)

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