Business Features

ANALYSIS: Are we done? Experts ponder whether deal truly saves Greece

By Alvise Armellini Mar 10, 2012, 6:32 GMT

Brussels - Friday's news that Greece had managed to strong-arm a large enough number of private lenders to forgive part of its public debt was greeted with relief by European Union officials and with scepticism by financial analysts.

'We have turned a corner in the crisis. We are sailing towards calmer waters,' EU President Herman Van Rompuy posted on the micro-blogging website Twitter.

EU Economy Commissioner Olli Rehn declared himself 'very satisfied' that about 83 per cent of creditors had agreed to take part in a bond-swap deal expected to ultimately shave about 100 billion euros (132 billion dollars) off Greece's debt mountain.

The participation rate is expected to rise over 95 per cent once the Greek government triggers so-called collective action clauses (CAC), which would force losses on the remaining part of bond holders that have so far refused to join the debt forgiveness exercise.

The CAC decision - which eurozone finance ministers have confirmed will have to be taken - might cause a form of insurance against default known as credit default swaps (CDS) to be paid out to some Greek bond holders.

Such a scenario was seen as worrying in the past months, because when CDS were paid out after the collapse of US investment bank Lehman Brothers, a chain reaction led to the global financial crisis of 2008-2009.

This time, however, experts say markets are prepared and no panic is expected. The problems with the latest Greek rescue plan are different, they say.

All the new rescue package will do is 'provide Greece and the rest of the eurozone with a bit of time, at best,' Ben May from the London-based Capital Economics research outfit predicted.

Sony Kapoor, head of the Re-Define financial think tank and a well-known critic of the eurozone's response to its debt crisis, is convinced that a third bailout for Greece is inevitable.

Simon Penn, an analyst with Swiss bank UBS, was less resolute.

'As things stand, people would be about 50-50' about the likelihood of a new bailout, he told dpa.

The latest aid package is meant to cover the country's needs until 2014. But few believe that after that date Athens will be able to finance its debt on its own.

'They are not going to be able to come back to the market in 2015,' Penn said.

The German and Dutch finance ministers, as well as Eurogroup chief Jean-Claude Juncker, have all refused to rule out a third rescue package in the medium term.

Open Europe, a British eurosceptic group, pointed out that because private lenders had been squeezed this time, European taxpayers would have to bear the brunt of the bill next time Athens comes knocking for money.

Alternatively, they would suffer the consequences of a Greek default, given that - according to Open Europe's calculations - by 2015 as much as 85 per cent of the country's debt will be held by taxpayer-backed institutions.

In comparison, the proportion of Greek debt held at the beginning of this year by the European Central Bank, eurozone institutions or the International Monetary Fund (IMF) was only 36 per cent, according to Open Europe.

Downside risks for Greece stem mainly from expectations that its economy will not be able to pick itself up while it is being subjected to yet more rounds of EU and IMF-mandated rounds of austerity.

Deficit reduction targets have been eased, but Athens is still expected to apply draconian measures. At the same time, it is being asked to pursue structural reforms which are politically costly but unlikely to have immediate beneficial effects on growth.

Juncker said the Eurogroup wants Greece to 'rigorously pursue the adjustment effort, strictly in line with the new programme,' while Rehn has stressed the need to 'timely implement the policy (reform) package.'

Capital Economics has been predicting for months that the new Greek government that will emerge from elections due to take place in April or May will ask for time out from the pace of EU-IMF reforms or simply walk away from the bailout programme and trigger a default.

Another concern is that Greece's debt restructuring has broken a taboo, by effectively ushering in a new era in which a developed European economy can effectively default, albeit in a controlled and partial way.

That might pave the way for other vulnerable eurozone countries like Portugal or Ireland to also force losses on their creditors - although the EU mantra is that Greece will remain 'a unique case.'