Greece has put a dampener on the New Year rally, warning that the country will have to leave the eurozone unless it can reach agreement with its international creditors over its latest €130 billion ($US170 billion) bailout package.
“This rescue package must be signed otherwise we are out of the markets, out of the euro,” a Greek government spokesman, Pantelis Kapsis, warned in a television interview.
The dire comments were seen as an effort by Greece’s caretaker leader, Lucas Papademos, to put an end to bickering in his coalition government over key reforms ahead of an impending visit from officials from the ‘troika’ – the European Central Bank, the IMF and the EU – who will negotiate the country’s latest €130 billion bailout package, and to prepare the Greek population for tough new austerity measures. Greek officials are generally careful to avoid raising the possibility of Greece quitting the eurozone and returning to the drachma.
But Athens is racing against the clock to reach agreement on its latest €130 billion bailout package, which was agreed to in principle last October. The deal involves Greece’s bond holders – such as banks, insurance companies and pension funds – agreeing to take a haircut of 50 per cent haircut on their investments, which would cut Greece’s overall debt burden by €100 billion. But negotiations have stalled. Greece must roll over €14.5 billion in debt on March 20, and the country could default unless its bailout package has been agreed by that date.
In the interview, Kapsis acknowledged that negotiations with the bondholders were proving particularly difficult. “The next three or four months are the most crucial and that is why this government exists”, he said.
At the same time, officials from the troika are due to arrive in Athens on January 16 to check on the progress the country has made in implementing reforms and austerity measures promised in exchange for its €130 billion rescue package.
Greece’s parliament approved its latest batch of austerity measures, including tax rises and spending cuts, in early December after the formation of the Papademos government. But EU officials remain concerned that Greece has failed to hit its deficit targets for the year, and to implement much-needed reforms. The country now faces the formidable task of slashing its deficit from at least 9 per cent of GDP in 2011 to below 5 per cent in 2012. “There is a chance that there will be a need for additional measures. No one can rule this out,” Kapsis acknowledged.
But Greece’s austerity measures continue to encounter stiff opposition. On Monday, Greek doctors and pharmacists went on strike in the country’s first industrial dispute of the year. State hospital doctors have warned they will treat only emergency cases until Thursday.
The EU has also been critical that Athens has failed to combat widespread corruption and tax evasion. But the Greek government appears to be stepping up its campaign against tax evasion. On Monday, a top Finance Ministry official was charged with failing to collect fines that were levied on heating oil companies found guilty of smuggling.
The latest warning from Greece is likely to challenge rising optimism that Europe’s debt crisis could be warning, following the European Central Bank’s move to provide banks with unlimited three-year loans at an interest rate of 1 per cent. Banks borrowed €489 billion at the ECB’s first three-year offering last month.
Investors have interpreted the ECB’s move as showing that the central bank is willing to print as many euros as needed to support the troubled European banking system. Banks will be able to rely on cheap ECB money to top up their dwindling deposits, and to replace the funding that they previously obtained from bond issues and from the interbanking lending market.
But many believe that this optimism is misplaced, particularly as the ECB’s ballooning balance sheet shows that banks remain unwilling to lend. While banks are now able to obtain funding from the ECB, they’re recycling a large part of the money into deposits with the ECB, as contingency reserves in case the eurozone situation darkens further.
The latest warning from Athens makes it easy to understand why the banks are being so cautious.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.