The euro zone member was faced with a €14.5 billion March 20 repayment deadline, and the deal is centered on a debt swap that pushes private creditors (that is, EU banks) to take a whopping 53.5 percent haircut, says the Wall Street Journal.
Meanwhile “work remains to be done” according to Reuters and some diplomats and economists do not expect the package to resolve Greece’s long range economic problems.
Trouble Still Looms
In sum, the bailout plan requires the faltering debtor nation to cut an array of entitlements such as pensions, the minimum wage, health-care and defense spending, while whacking state employees and holding fire sales of various assets. All these austerity measures must be implemented with the country’s unemployment at 20 percent which explains (but does not justify) the mayhem in the streets of Athens and elsewhere.
Be that as it may a number of economists contend that Greece will fail to deliver on it promises given the lingering global recession, elections there as well as in France, Germany and the US and the upheaval and social unrest in the Greek street.
Despite the reception of the bailout in the broader markets, some economists in the EU and the US still maintain that Greece may miss its June deficit goals and still faces the possibility of a default by year-end. Moreover, there is a growing narrative that the EU could still stop payments to Greece if draconian reforms are not implemented.
Who will foot the bill?
At the end of the day, banks and insurers will swap bonds they hold for longer-dated securities that pay a lower coupon, resulting in a real 70 percent reduction in the value of the assets. The bond swap will occur early next month so that a 14.5-billion-euro bond repayment due on March 20 would be restructured, allowing Greece to avoid default.
Most of the funds in the 130-billion-euro program will be used to finance the bond swap and to ensure Greece’s banking system remains stable, €30 billion will go to so-called “sweeteners” to get the private sector to buy into the swap deal while €23 billion will go to recapitalize Greek banks. Finally, another €35 billion will allow Greece to finance the buying back of the bonds, and the remaining €5.7 billion or so will pay off the interest swapped bonds.
The overall objective is to reduce Greece’s debts from 160 percent of GDP to around 120 percent by 2020.
Will there be blowback at home?
While the success or failure of the measure will have serious consequences either way in the EU, the lingering effects at home are arguable where JP Morgan head honcho Jamie Dimon has reportedly said that the Greek debt problem would have a negligible effect on the US capital markets, mostly because US banks are not holding large stakes in Greek debt, notwithstanding the fact that MF Global tanked because of its holdings in several zone sovereign debt nations.
Moreover, the US capital markets have been able to absorb the MF Global soufflé; however, the question remains if the latest Greek bailout will be sufficient in the long run to get the Greeks back on their feet so that the country’s people can do something more productive than taking their displeasure to the streets and burning down government buildings.
Given the success of the 2010 €110 billion bailout, it is uncertain at best whether Greece will be able to right itself by the end of 2012. In short some observer says that the second Greek bailout deal may not be much different from previous landmarks in Europe’s lingering debt crisis where EU big wigs shake hands in the Parthenon while privately harboring doubts about the future.
By Kyle Colona, from: http://www.linkedin.com/news?viewArticle=&articleID=5578883206989492258&gid=1799642&type=member&item=97211674&articleURL=http%3A%2F%2Fcompliancesearch%2Ecom%2Fcompliancex%2Feurocrisis%2Fwill-greek-bailout-haunt-the-eu-and-the-us%2F&urlhash=XA60&goback=%2Egde_1799642_member_97211674
Kyle Colona is a New York based freelance writer and a Feature Writer for the Compliance Exchange and Wall Street Job Report. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications.