Musical Chairs In The Eurozone


European politics seems like a mixture of déjà vu and musical chairs these days. Everyone expects the music to stop very soon and one main question remains: who will be left with Greek bonds and credit default obligations when the country finally goes broke?

The only parties left playing are the Greek government and Euro Group boss Jean Claude Juncker, who is in charge of assuring the stability of the European currency. On Sunday, the European papers were filled with many of the same old assurances from Greek government ministers.

In a nutshell, the headlines went like this. Greece: this time we will do, this time it we can do better. This time, it’s different.

But despite all the promises of more cuts to boost Greece’s export competitiveness, there are signs that this time, the latest talks between the Troika (the IMF, the World Bank and the European Central Bank) may fail, and the country may finally default.

"Consultations held with the Greek leadership about how to save the country from bankruptcy came to an end on Sunday without an agreement," was how the German financial daily Handelsblatt reported the non-outcome of the Troika’s talks with Athens late on Sunday.

Among the measures promised by Lucas Papedemos are wage cuts of up to a third and "a GDP 1.5 per cent streamline of the Greek state" when the talks resume on Monday, says Handelsblatt.

But there’s little political will in Greece to implement Papademos’ plans, continues the financial daily. It claims that at home, Papedemos seems isolated. Many of the Greek parties are rebelling against the measures.

The conservative New Democracy Party was promising to "fight the measures" with "all means possible", continues Handlesblatt. Meanwhile, the far-right LAOS Party — a backer of Papademos until now — warned of a "revolution" and the "immiseration" of the Greek population.

On the other hand, Euro Group head Juncker is warning that without those measures, "Greece may fail in the next two months", says Il Sole 24 Ores, the Italian financial daily. "If we have to conclude that everything has gone wrong in Greece, then here won’t be any new rescue programs, with the consequence being that Greece will declare bankruptcy in March," Juncker said in an email interview with German weekly Der Spiegel.

But, counters Il Sole 24 Ore, even if the Troika is satisfied that Greece has done enough to ensure its future competiveness — and hence, its ability to gradually pay back its debts — private creditors aren’t so sanguine about making an agreement with the country right now: "Negotiations with private creditors, which have been underway for the past three months, remain at an impasse due to disagreements surrounding the yields on bonds that will be offered to creditors in exchange for the cancellation of 50 per cent of Greece’s debt," says Il Sole.

"The private creditors are insisting on a yield of no less than 4 per cent, which would limit real bank losses to 60 per cent", while the IMF wants Greece to pay yields of 3 per cent." But there are signs that the banks, too, are expecting Greece to default — with drastic consequences for the European currency.

"The departing chairman of Deutsche Bank, Josef Ackermann, has urgently warned that the Eurozone could collapse if Greece goes broke," reported the Frankfurter Allgemeine Zeitung on Sunday.

Ackermann is still looking to prevent that Greek default, says the FAZ. The head of the banking lobby group the Institute for International Finance was to fly to Athens on Sunday to try and conclude an agreement with the Greek government.

But while Ackermann believes that Greece may not default, others at Deutsche Bank are less optimistic. One of Ackermann’s two successors at Germany’s largest bank, Indian-American banker Anshu Jain, was warning in mid-January of an "unprecedented event in the next two months", according to an article published in Die Welt at the time — without specifying what exactly he was talking about.

And some European political leaders caution that Greece is already broke. "In a salvo launched en route to a leader’s meeting in Brussels, outgoing Swedish Prime Minister Fredrik Reinsfeldt said Greece is in reality bankrupt, and hopes that it can continue to live from other’s loans," reported Svenska Dagsbladet on Friday.

When asked about German plans to introduce a budgetary commissar to monitor Greek spending, Reinsfeldt again attacked the Mediterranean country, continues the Stockholm paper: "You can discuss designs … [but]Greece is a country that is in reality bankrupt, and comes back to you now and then with demands to fund its public works, which are [then]not conducted," Reinsfeldt told the Swedish TT newsagency.

And while Greece faces default, the situation in Portugal is not looking much better than that of Hellas, reported French paper Le Monde over the weekend. "The risk of a Portuguese default is becoming more and more troubling," opined the paper in its Saturday edition. "In a sign that this scenario is being taking seriously by investors, the short-term cost of borrowing is higher than the long-term cost, which has itself risen dramatically. On Monday, the yield on 10 year bonds was trading at 17.20 per cent, more than six percent above the level that is considered to be sustainable. Meanwhile, two-year bonds rose to 20.875 per cent."

The likelihood that Portugal will default comes after the country’s banks announced huge losses at the start of February. After one of Portugal’s big three, BCE, announced losses of 786 million Euros in 2011, the bank is to "use public money to reinforce its capital," revealed Público from Lisbon last week.

The bank’s chairman, having "consulted with the principal shareholders" sent a plan to the Portuguese regulator. In it, BCE specified that it wants to recur to a "line of credit that is temporary and repayable", says Público.

Still, while it seems like Greek and Portuguese citizens may continue to have to pay for their state debts, traders report big profits on the junk bonds of highly indebted nations. A senior economist working at a large European credit ratings agency boasted to New Matilda two weeks ago that he was making hundredfold returns on Greek bonds.

"As long as you get in and out quickly, you’re fine," said the trader, requesting anonymity.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.