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Greece rushes to complete ‘prior actions’ to gain second bailout; Markets question debt sustainability and involvement of private sector in Greek bailout

22 Feb 2012

The Greek government is rushing to approve and implement the list of ‘prior actions’ which it must complete by the end of February in order to get its second bailout, including cuts to the minimum wage and liberalisation of closed professions. The difficulty in meeting this list of demands, along with questions over Greek debt sustainability, is feeding a subdued market response to the deal. Figures published by the Greek Finance Ministry predict that Greece’s deficit will be 6.7% this year rather than the target of 5.4%, due to a deeper than expected recession, according to Der Spiegel. Greek officials have also said they still need to find ways to cut a fiscal gap of 5% of GDP by 2014, which could require cutting government expenditure by 6.9% in 2013 and 5% in 2014, according to the FT. Greek trade unions have announced another round of protests in Athens today.

The scheme for private sector involvement will be launched today, with significant uncertainty surrounding the level of participation it will achieve. The Greek parliament is preparing to retroactively introduce collective action clauses to Greek bond over the next few days, which will allow Greece to force all bondholders into a restructuring if 66% agree to the deal. Open Europe’s Raoul Ruparel is quoted by the NY Times warning that the second Greek bailout “could drive a wedge between north and south in political terms in Europe.” Open Europe’s response to the second Greek bailout was featured by Zerohedge, Huffington Post and on the Deal.

Die Welt estimates that, under the terms of the agreement, the risk to German taxpayers will more than double from €30bn to €61bn. However, the paper argues that €10bn of this has already been lost for good – since government-backed financial institutions will also participate in the voluntary private sector debt write-down.

El País reports that, according to government sources, Spain will ask the European Commission to revise its deficit reduction target for 2012 downwards within the next ten days. Separately, the lower house of the French parliament yesterday approved the treaty establishing the eurozone’s permanent bailout fund, the ESM. 256 MPs voted in favour and 44 against, while Socialist MPs abstained, notes the Nouvel Observateur.

The Telegraph reports that discussions over the increase in the size of the eurozone bailout funds and IMF contributions will take place at the G20 summit this week, with the IMF making any increase in its reserves conditional on the eurozone agreeing to increase its bailout funds.
FT CityAM CityAM 2 WSJ WSJ 2 Independent NYT EUobserver EUobserver 2 EUobserver 3 Times Times 2 BBC Mail Mail 2 Express FT 2 CityAM 3 WSJ 3 Welt Süddeutsche FAZ Bild Welt 2 FT 3 CityAM 4 FT 4 FT 5 Kathimerini Telegraph Irish Times Independent 2 Telegraph blogs: Persson El País Le Figaro Nouvel Observateur Les Echos Tribune Telegraph 2 Nederlands Dagblad Spiegel Der Standard FTD FTD 2 FT 6 Repubblica La Stampa

Mats Persson: Two-tier bond market established by second Greek bailout creates new risks;
European media warn of political backlash against second Greek bailout
On his Telegraph blog, Open Europe’s Director Mats Persson yesterday looked at some of the unresolved issues surrounding the second Greek bailout, noting, “New debt issued by the Greek government in 2014/2015 will essentially be junior to existing debt. This raises the question why private creditors would want to purchase Greek debt at all in three years' time, given that they would be first in line for any losses if Greece’s economy goes down the tubes. Taken together with the tough austerity targets which could choke of any chance of recovery, as the [debt sustainability analysis] admitted, this may force Greece to seek another €50bn bailout after 2014,” as investors will have little incentive to hold Greek bonds. Mats’ latest blog post also featured on the Telegraph’s live blog yesterday.

An editorial in Italian business daily Il Sole 24 Ore notes that, with the second Greek bailout, “Europe enters into the heart of the state’s supreme authority, showing that monetary and fiscal policies are now detached from the sphere of the nation’s exclusive prerogatives.” In Spanish business daily Expansión, Juan Castañeda writes, “This European way out of the crisis in which national institutions democratically elected by citizens are gradually losing the effective ability to rule their countries…to the advantage of European institutions chosen by states will do nothing but distance even more the citizens from the so-called European project.”

The front page of Die Welt runs with the headline, “Europe – Welcome to the Transfer Union.” FAZ’s Economics Editor Holger Steltzner argues, “The prices must fall if Greece wants to compete with its neighbours in agricultural products or tourism. Normally such an adjustment works via the exchange rate with the devaluation of the own currency. But members of the monetary union have relinquished this instrument. In Greece wages and prices would have to fall by half in order to become as successful as Ireland. That is too much – there is a lack of will and force. Therefore, a third credit package is coming – or the farewell to the euro.”

Werner Hoyer, the head of the European Investment Bank, has told Handesblatt that Greece needs a new ‘Marshall Plan’ to accompany its austerity and reform package, and that the EIB is launching a new special programme aimed at making it easier for Greek banks to lend to companies.

Poland’s former Deputy Finance Minister Gregorz Kolodko writes in the FT, “[Things] are heading for a catastrophe that is already unfolding, albeit in slow motion. Cheating the public and miscalculating and misleading the market is neither a strategy, nor a policy. It is sheer stupidity.”
Telegraph blogs: Persson Welt Times: Finkelstein Times: King Independent: Ben Chu Independent: Leader Le Figaro: Editorial Il Sole 24 Ore: Editorial Expansión: Castañeda Telegraph: Editorial Telegraph: Evans-Pritchard FT Editorial FT: Wadhwani FT: Kolodko FT: Barber CityAM: Crow WSJ Review & Outlook WSJ: Stephens Irish Independent: McWilliams Les Echos Les Echos Tribune FAZ: Steltzner Handelsblatt

The FT reports that opposition parties, business and trade union leaders are stepping up calls for the Portuguese government to renegotiate the terms of Portugal’s bailout to reduce the level of austerity which is seen to be causing a deep recession and record levels of unemployment.
FT

UK, Sweden and the Netherlands refuse to sign off 2010 EU budget
At yesterday’s meeting of EU finance ministers, Chancellor George Osborne and his Swedish and Dutch counterparts voted against the discharge of the 2010 EU budget, after the European Court of Auditors found material errors in EU spending for the seventeenth consecutive year. However, the accounts were approved by a qualified majority of EU finance ministers. Meanwhile, the Treasury Economic Secretary Chloe Smith yesterday criticised the planned 1.7% pay increase for EU officials, arguing that it was evidence of the European Commission’s “estrangement from reality”.
EUobserver FT WSJ European Voice EUobserver 2 Express

The Huffington Post reports that former Foreign Secretary Jack Straw has warned against any further major EU treaties being passed without the direct approval of the public. The European Parliament has “not worked” as a democratic institution, Straw claimed. He called for it to be reformed so that it was an “assembly of national parliaments”. He declared, “enough is enough with the EU Parliament being directly elected.”
Huffington Post

Belgian daily De Tijd has obtained information that, at the upcoming EU summit on 1-2 March, European Council President Herman Van Rompuy is to be “almost silently” re-appointed for another two-and-a-half year mandate.  
De Tijd Elsevier

In evidence given to the House of Commons’ Transport Committee, pilots’ union Balpa warned that new EU proposals on working hours for pilots are “a danger to public safety”.
Open Europe research

Bloomberg reports that Russia is hosting a two-day meeting of non-EU countries opposing European Commission plans to include all airlines flying in and out of European airports in the EU’s Emissions Trading System.  
Bloomberg

Public Service Europe reports that, on 17 March, the European Parliament is expected to find out that its art collection, which is currently insured for €4.2m, is worth much more than the previous estimates.
Public Service Europe

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