European officials have persuaded Greece’s politicians to squeeze more tax dollars out of the rich, the poor and even themselves. Now they have to prevent the country’s bondholders from pulling their money and running for the exits.
In a continent-wide series of sensitive talks over the next week, finance officials in Germany, France and other European countries will try to coax banks, pension funds and others who hold Greece’s bonds to keep their money invested in a nation regarded as an increasingly poor risk.
Reminiscent of the discussions held in Uruguay, Mexico, Turkey and other nations that have had to navigate debt crises, the negotiations this time are being held in the executive suites of Frankfurt, Paris and other financial centers of the developed world.
The talks with private sector investors are a critical step in addressing Greece’s renewed crisis, and if they fail to produce the intended results — perhaps $30 billion or more in commitments from private investors to keep their money in place — a tentative financial plan for the country could unravel. Ratings agencies are watching, and have said they will declare Greece in default if it appears that investors are being forced to buy new Greek bonds or accept losses on their existing ones, instead of the “voluntary” participation promised by European leaders.
“The banks have got to be convinced that it is in their interest to roll it over . . . because otherwise you end in default,” said William R. Rhodes, the former senior vice chairman of Citigroup who helped negotiate the involvement of private bondholders in debt crises in Latin America and Asia. As opposed to the steep losses bondholders face if the country defaults, “you give the Greeks time” to restore their economy, he said. “That is the big selling point.”
The outlines of a new Greek rescue program continued falling into place on Friday when European officials accepted the country’s proposal to raise taxes and cut spending by an additional $40 billion by 2015 — the equivalent of about 3 percent annually of the country’s economic output — and sell about $70 billion in state-owned assets.
But the country still faces hurdles as it tries to ensure the release of $17 billion in emergency loans, due from the International Monetary Fund and European nations, it needs to make upcoming payments to investors.
Next week, Prime Minister George Papandreou must persuade the country’s parliament to accept the deal agreed to by European officials, imposing yet another round of budget cuts and tax increases on a country reeling from 16 percent unemployment and skeptical that further austerity will lead to renewed economic growth.
And the talks with the banks and other investors — largely Greek, French and German institutions that hold large amounts of Greece’s debt — need to succeed.
Bonds are essentially loans that pay interest over a set number of years, with the full, face amount due at the end of the time period. Greece has about $155 billion coming due over the next three years.
Money from the IMF and Europe will help make some of those payments — essentially turning Greece’s private debts into loans from European and international taxpayers. But as a condition of further public lending, European countries want private bondholders to help by reinvesting their upcoming bond payments back into Greece.
It is not clear how that investment will be made. Ideas have included an exchange of Greece’s bonds for bonds whose repayment is guaranteed by all the nations that share the euro, likely lowering the interest rate that would be paid, along with providing a longer repayment period.
Rhodes and other analysts give the process a high chance of success — largely because there would be far greater risk to banks and other financial institutions if Greece were to default, an event that would shake the European and perhaps the world economy.
He noted that when he was a negotiator in Uruguay’s 2003 debt crisis, roughly 95 percent of the bondholders agreed to participate in a program that extended the due date of their bonds by five years — drastically lowering the immediate cash needs of a nation on the brink of default.
Source: www.washingtonpost.com
In a continent-wide series of sensitive talks over the next week, finance officials in Germany, France and other European countries will try to coax banks, pension funds and others who hold Greece’s bonds to keep their money invested in a nation regarded as an increasingly poor risk.
Reminiscent of the discussions held in Uruguay, Mexico, Turkey and other nations that have had to navigate debt crises, the negotiations this time are being held in the executive suites of Frankfurt, Paris and other financial centers of the developed world.
The talks with private sector investors are a critical step in addressing Greece’s renewed crisis, and if they fail to produce the intended results — perhaps $30 billion or more in commitments from private investors to keep their money in place — a tentative financial plan for the country could unravel. Ratings agencies are watching, and have said they will declare Greece in default if it appears that investors are being forced to buy new Greek bonds or accept losses on their existing ones, instead of the “voluntary” participation promised by European leaders.
“The banks have got to be convinced that it is in their interest to roll it over . . . because otherwise you end in default,” said William R. Rhodes, the former senior vice chairman of Citigroup who helped negotiate the involvement of private bondholders in debt crises in Latin America and Asia. As opposed to the steep losses bondholders face if the country defaults, “you give the Greeks time” to restore their economy, he said. “That is the big selling point.”
The outlines of a new Greek rescue program continued falling into place on Friday when European officials accepted the country’s proposal to raise taxes and cut spending by an additional $40 billion by 2015 — the equivalent of about 3 percent annually of the country’s economic output — and sell about $70 billion in state-owned assets.
But the country still faces hurdles as it tries to ensure the release of $17 billion in emergency loans, due from the International Monetary Fund and European nations, it needs to make upcoming payments to investors.
Next week, Prime Minister George Papandreou must persuade the country’s parliament to accept the deal agreed to by European officials, imposing yet another round of budget cuts and tax increases on a country reeling from 16 percent unemployment and skeptical that further austerity will lead to renewed economic growth.
And the talks with the banks and other investors — largely Greek, French and German institutions that hold large amounts of Greece’s debt — need to succeed.
Bonds are essentially loans that pay interest over a set number of years, with the full, face amount due at the end of the time period. Greece has about $155 billion coming due over the next three years.
Money from the IMF and Europe will help make some of those payments — essentially turning Greece’s private debts into loans from European and international taxpayers. But as a condition of further public lending, European countries want private bondholders to help by reinvesting their upcoming bond payments back into Greece.
It is not clear how that investment will be made. Ideas have included an exchange of Greece’s bonds for bonds whose repayment is guaranteed by all the nations that share the euro, likely lowering the interest rate that would be paid, along with providing a longer repayment period.
Rhodes and other analysts give the process a high chance of success — largely because there would be far greater risk to banks and other financial institutions if Greece were to default, an event that would shake the European and perhaps the world economy.
He noted that when he was a negotiator in Uruguay’s 2003 debt crisis, roughly 95 percent of the bondholders agreed to participate in a program that extended the due date of their bonds by five years — drastically lowering the immediate cash needs of a nation on the brink of default.
Source: www.washingtonpost.com
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