Knots in a Greek debt deal

Greece won't receive its bailout until it meets three key conditions, but even then no one is sure how many lenders will support the deal.

Global financial markets have been in rally mode after the Greek parliament ticked off on the country’s latest austerity package, but Athens still faces some daunting challenges if it is to avoid defaulting on its debt in late March.

German Chancellor Angela Merkel has left no doubt that debt-strapped Greece will not receive its second bailout until it meets three key conditions.

In the first place, Greek political leaders must undertake the unsavoury task of finding a further €325 million in spending cuts that are needed so that the country can meet its targets for reducing its budget deficit.

Greece’s main political leaders will also have to provide a written pledge that they’ll stick to the austerity program after Greece’s next general election, which is likely to be held in April. This is especially important after Antonis Samaras, who leads the centre-right New Democracy party and who is expected to become Greece’s next prime minister, suggested that, post-election, he would try to renegotiate the deeply unpopular austerity program.

Finally, Greece won’t get its bailout money until it wraps up its restructuring talks with lenders – such as banks, insurance companies and pension funds – over the restructuring of the country’s €200 billion of privately-held debt. After lengthy negotiations, the Institute of International Finance (which is representing private creditors) has largely agreed to a deal that will see lenders accepting a writedown of 70-75 per cent of their loans to the debt-strapped country. Greece’s private sector lenders will swap their old bonds for new bonds, which have longer maturities and which pay much lower interest rates.

The problem is that no one is sure how many of Greece’s lenders will support the debt restructure. There are fears that hedge funds, which have been buying up Greek bonds at heavily discounted prices and which now hold an estimated €70 billion of Greek bonds, could try to block the deal. There are reports that some hedge funds have bought credit default swaps as insurance against a Greek default, and could make handsome profits if the debt restructuring talks falter. If the debt deal falls apart, and Greece misses out on its €130 billion bailout, the country could default on a €14.5 billion debt repayment that is due on March 20.

But even if Greece does meet all the conditions for its second bailout, European political leaders are increasingly questioning the wisdom of the endless cycle of austerity and bailouts for the debt- country.

Increasingly, Merkel is facing a backlash within her own conservative Christian Democratic Union from German politicians who are tired of hearing that, once again, Greece has failed to meet its reform commitments, and that even more German money is needed to salvage the country.

Scepticism is also growing in France. According to a report in the French newspaper Le Monde, former French president Valry Giscard d'Estaing – who was a major champion of Greece’s entry into the eurozone – last week told French parliamentarians that it would have been better for Greece to leave the euro.

At a closed briefing, Giscard d'Estaing said that Greece was being forced to endure an internal devaluation, at the same time as it had a strong currency. "It’s an insoluble equation”, he said.

Instead, he said, it would have been better to arrange a situation where Greek politicians had the autonomy to manage a "transition period.”

The former French president, who was a major driver of the eurozone’s constitution, also lashed out at eurozone political leaders. He criticised the way they had managed the region’s debt crisis, saying it was "defensive and confused, with too many statements and too many meetings which, every time, led to increased speculation.”

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