Chaos is a Greek Word

by Andrew Stuttaford

It’s not looking pretty.

Via Reuters:

(Reuters) – Greece’s 2011 budget deficit will be wider than the amount agreed with international creditors as part of a bailout deal, a German newspaper reported the Greek economy minister as saying on Thursday. Michalis Chrysochoidis told Stuttgarter Zeitung that Greece however still expects the so-called Troika mission of lenders to grant the next tranche of aid since the difference would not be so large.

“The deficit will be higher than agreed, but that is the recession’s fault,” he said, confirming what sources told Reuters last week. “Since many jobless are no longer paying into the social security funds, the budget must cover the shortfall.”

“New measures should lower the deficit a bit, but it looks impossible we’ll meet the original 7.6 percent target,” Chrysochoidis said, adding that there should be no doubt Athens will meet its reform commitments.


German Finance Minister Wolfgang Schaeuble told parliament in Berlin on Thursday it was “up to Greece as to whether it can fulfill the conditions that are necessary for membership in the common currency”.

Euro zone leaders have hitherto dismissed any idea of a country leaving the euro zone, arguing that it would bring disaster on that nation and cause severe systemic problems for other partners in the 17-nation currency bloc. But some are now starting to talk about the unthinkable, possible to try to jolt Athens into more drastic action. Schaeuble has ramped up his rhetoric since “troika” inspectors from the European Union, International Monetary Fund and European Central Bank suspended talks on payment of a new aid tranche to Greece last week due to backsliding on its deficit targets.

Technical point: there is currently no mechanism in place that allows for a country to be expelled from the euro, or voluntarily withdraw from it.

Edward Hugh of a A Fistful of Euros weighs in with another twist:

The easiest thing to assume is that all of this [the tough talk from Germany and others] is simply a bout of strong rhetoric to try and force the Greek government to fall into line. But there is another issue looming which could also threaten to upset the apple cart if the ball bounces the wrong way, and that it the proposed bond swap that constitutes the core of the private sector involvement (PSI) included in Greece’s second bailout program at Angela Merkel’s insistence.

One of the little-discussed features of this swap, which involves some 135 billion euros in Greek debt, is the effect it will have on the legal framework governing Greek bonds. At the present time, some 90 percent of those bonds are governed by Greek law, a state of affairs which would evidently give the Greek authorities a certain advantage were there ever to be a hard default…Given this, it’s hard to understand why anyone in such a uniquely favorable position and facing the possibility, nay the probability, of a hard landing would wish to voluntarily surrender it. Yet this is just what will happen if the PSI bond swap goes ahead, since the new bonds will be issued under international and not Greek law.

Under the circumstances it’s perhaps not surprising that the Greek government said that it would not accept the bond swap unless at least 90 percent of bondholders had bought into it by September 9. As at the time of writing, that target had not been met, but then, bankers were saying, maybe that wouldn’t matter so much after all.


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