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Germany demands that Greece give up control of its budget--is this the price that Greece won't pay for a bailout?
01/30/2012 12:40 pm EST
Looks like that this morning.
Sure, there’s an element of posturing to the rhetoric coming out of Berlin as German leaders try to win themselves some political cover with an increasingly restive electorate fed up with the idea of sending more money to Greece. But I think the demand from Germany, the Netherlands, and Finland for a European Commission to take over the Greek budget speaks to a belief that on past performance no Greek government can be trusted to actually make any promised budget cuts.
It will be very tough to negotiate this one. Greek finance minister Evangelos Venizelos has already rejected the German proposal. And German rhetoric is getting tougher. Michael Fuchs, the economic spokesman for Chancellor Angela Merkel’s Christian Democratic Union in parliament, told Bloomberg today “No external controls, no money.”
And clearing this hurdle with some vaguely worded face-saving agreement would leave an even bigger challenge. The troika of the International Monetary Fund, the European Central Bank, and the European Union that actually has to sign off on the next rescue payment to Greek has presented the Greek government with what the Financial Times reports is a 10-page list of things the government must do before it gets a new bailout program. The list includes cutting another 150,000 public sector jobs over the next few years and slicing the budget deficit for 2012 by another one percent of GDP. Greece faces a 14.4 billion euro bond payment on March 20. No money from the troika means a Greek default.
All this has overshadowed news that Greece and its creditors have largely finished their deal on writing down the value of Greek debt. Bondholders have agreed, according to reports this morning, to accept a coupon yield of just 3.6% (instead of their earlier demand for 4%) on a new 30-year bond that would be issued to replace existing Greek debt. With the lower coupon the deal amounts to a 69% haircut, well above the 50% loss envisioned in the October Greek debt package.
Also overshadowed is the European Union summit that begins today in Brussels. Top on the agenda at that meeting are plans to speed the establishment of a permanent 500 billion euro rescue fund and a German-sponsored treaty designed to enforce fiscal discipline. That treaty is intended to restore confidence to the financial markets by creating ironclad, constitutional guarantees of budget discipline by EuroZone members.
I’d be surprised if financial markets saw any agreement on fiscal discipline as a significant step to ending the euro debt crisis. The EuroZone economy is projected to shrink by 0.5% this year and investors understand that even a modest recession will make all current budget calculations worthless. Already the International Monetary Fund figures that because of the continuing decline of the Greek economy, the country needs 145 billion euros rather than the 130 billion euros negotiated last October.
In essence, it’s now all up to the Greek government. Do they fold on those pesky issues of national sovereignty or go for default?