(Associated Press)
Poul Thomsen, the International Monetary Fund mission chief in Greece, met with Greek Finance Minister Evangelos Venizelos in Athens, Friday. European Union and International Monetary Fund representatives start new round of talks with officials in the Greek capital on the course of Greece's austerity program and pledged reforms.
By John W. Schoen, Senior Producer
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Though a long-awaited deal between Greece and its investors might buy Athens some time, it will do little to fix the financially crippled government's problems.
Representatives for Greek bond holders were reported to have made progress Friday toward a deal that would cut the value of their holdings by as much as 70 percent as part of a "voluntary" debt swap aimed at?avoiding a disorderly default.
The deal reportedly involves swapping existing bonds for a new package of cash and paper worth about half the face value of the outstanding debt. Bondholders are also being asked to accept a lower interest rate on the new bonds, possibly tied to Greece's future economic growth, which would cut the value of the offer even further.
The pressure to finalize the agreement increases with every passing day. The European Union and International Monetary Fund are insisting on a bondholder "haircut" before releasing the next round of bailout payments from a 130 billion euro ($167 billion) rescue fund set up in October. Without those funds, Greece won't have enough money to meet a 14.5 billion euro ($18.7 billion) bond payment due March 20.
Because the paperwork for a bond swap is expected to take weeks to process, time is rapidly running out. Without a bondholder agreement, failure to make full payment would produce a disorderly default, with what could be dire consequences for the global economy just as the U.S. recovery is picking up.
A deal would buy the Greek government some time to try to right its listing financial ship. A successful bond swap would cut some 100 billion euros ($129 billion) off Greece's total debt load of more than 350 billion euros ($452 billion). That would help Athens steer a course toward a debt load of 120 percent of gross domestic product in 2020, down from the current level of 160 percent.
But the financial lifeline from European officials comes with painful conditions that include more?spending cuts and tax increases. That will likely plunge the Greek economy even deeper into recession. Greece's?economy has already shrunk 13 percent from its pre-crisis peak. Unemployment is at record highs. Frequent protests and strikes against austerity measures have further deepened the economic contraction.
The shrinking Greek economy is cutting further into the tax base, forcing more spending cuts and tax hikes in downward spiral. Over the long term, the current rescue plan isn't sustainable, according to Ben May, an economist at Capital Insight who has been following the debt talks.
"Sooner or later we expect Greece to conclude that the conditions attached to the bail-out deal are simply too onerous and that its best option may be to terminate any rescue package, carry out another debt restructuring deal and abandon the single currency," he said in a note to clients.
Even if Greece and the banks reach a deal, it remains to be seen just how many bondholders will go along with the "voluntary" swap for new paper. If too few investors agree to take losses, the savings may not be large enough to stop the clock on Greece's debt bomb.
Greek Prime Minister Lucas Papademos has threatened to introduce a new law to force holdouts to take the deal. Some of those investors have threatened to sue if the government tries to force them to take losses, arguing the change in the bonds' terms?violates property rights.
Other investors, who bought so-called credit default swaps, are hoping Greece can't reach a deal and doesn't pay bondholders. Some $70 billion worth of those investments, which pay off like an insurance policy if Greece defaults, are outstanding.
The potential impact of such a?disorderly default is difficult to predict, much like the chain reaction that swept through the global financial system in 2008 in the wake of?Lehman Brothers' collapse. European regulators have told eurozone bankers they need to raise more capital to withstand such a financial shock, but the ongoing debt crisis has made that?difficult for many of them.
Even if they reach a deal and?enough investors accept it, the precedent will likely spook investors in other debt-burdened countries like Italy, Spain and Portugal, further raising their borrowing costs. ?
"Portugal is obviously the next in the line of fire," said Michael Cirami, a portfolio manager at U.S. investment managers Eaton Vance. "Portugal is unlikely to go unnoticed whether they strike a deal or not (on Greek debt restructuring)."
Lowering Greece's debt burden with a bond swap could avoid the financial chaos of an outright default. But it wouldn't blunt the impact on its bond rating and its future cost of borrowing.
"Greece is insolvent so it will default," Edward Parker, head of bond rater Fitch's sovereign debt group for Europe, told Reuters this week.
"We have said for a long time that we don't think this (swap agreement) is the way to go, and we would treat it as a default," Parker added. "It clearly is a default, however they try to spin it."
CNBC's Michelle Caruso-Cabrera has the latest details on Greece closing in on a debt deal and whether it could trigger a credit event.
Source: http://bottomline.msnbc.msn.com/_news/2012/01/20/10200251-greek-bond-deal-wont-fix-athens-debt-woes
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