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Monday, May 16, 2011

Greece Reality Check: Euro Crisis Worsens as EU Leaders Play for Time (Spiegel International , 16 May 2011)

Courtesy: "Spiegel International, Germany", 16 May 2011
Greece Reality Check
Euro Crisis Worsens as EU Leaders Play for Time
Europe's leaders are still opposing a Greek debt restructuring, and they are exacerbating the euro crisis as a result. The Greek economy is at risk of collapse and resistance to further loans for the troubled nation is mounting. The continent urgently needs a new bailout plan.The formal act was quickly settled, but German Finance Minister had no time to celebrate. The members of the budget committee in the German parliament, the Bundestag, had hardly given their blessing to billions in new aid for ailing Portugal last Wednesday before parliamentarians were drilling the finance minister with questions about the next troublespot -- Greece.

The lawmakers wanted to know more about the secret meeting held the previous Friday, which had been reported by SPIEGEL ONLINE and which top European politicians were still denying as their limousines were pulling up to the Château de Senningen in Luxembourg. Was it true that Greece needs billions more in financial assistance? More importantly, the parliamentarians wanted Schäuble to elaborate on reports that Greece is insolvent and that the government in Athens has already considered withdrawing from the monetary union.
In his lengthy response to their questions, the minister denied the reports, explained the turf battles during the negotiations in Brussels and asked the parliamentarians to remain patient until an international panel of experts had thoroughly assessed the situation in the country. "For now, we're going to wait until the results of the report are out in July. Then we'll see what happens next."
As they play down the issue, try to appease critics and play for time, Germany's finance minister and his European counterparts are determined to keep on denying reality in the struggle to rescue the common currency.
More than a year ago, they created a €110 billion ($157 billion) bailout fund for Greece. Since then, however, the likelihood of a government bankruptcy has only increased. The country's mountain of debts is growing, the economy is at risk of collapsing and the promised austerity programs are not progressing as planned.
Restructuring 'Out of the Question' -- For Now
As a result, economists and financial experts have long agreed that forgiving a large share of Greece's debts will be unavoidable. European leaders, however, seem to be resorting to denial and faith healing instead.
"A restructuring of Greek debts is absolutely out of the question," says French Finance Minister Christine Lagarde, while Schäuble notes: "A debt restructuring is not under consideration and is completely speculative."
Instead, the European Commission intends to fight the crisis with new debts, even though government officials in European capitals are still denying this, as usual. There is talk of a €60-billion loan package, additional austerity programs and even tougher austerity.
If the medicine isn't working, increase the dose. That, at least, is the treatment plan being pursued by the saviors of the euro in Brussels. A new austerity and loan program would not only increase Greece's debt and curb the economy even further. It would also stigmatize Greece as Europe's stepchild for decades to come, dependent on the goodwill of the lender nations, governed by the inspectors of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), a prospect London's Financial Times describes as a "political nightmare."
It would also worsen public antipathy towards the EU. Anti-EU parties are on the rise throughout the bloc, and beleaguered governments from Copenhagen to Rome have no better solution than to fight back with narrow-minded nationalism.
The Libyan crisis is a case in point. Germany initially opposed its allies, France and Great Britain, and then Rome and Paris squabbled over what to do with refugees from North Africa. Last week, the Danish government introduced border controls that may be in violation of European treaties.
Merkel May Face Party Rebellion Over New Loans
A new bailout program for Greece would poison the political climate, including the one within Berlin's coalition government. For weeks, lawmakers from Chancellor Angela Merkel's coalition of conservatives and pro-business Free Democrats (FDP) have voiced their concerns over Europe's strategy in the euro crisis. Now the prospect of even more billions for Greece is fueling their resistance.
If the coalition is forced to vote on new euro aid after the summer recess, Merkel's parliamentary majority will be in jeopardy. Government officials say Merkel may even have to call a vote of confidence to get the funding approved.
Still, it is becoming clear to most European governments that the bailout programs for Greece cannot continue in their current form. For weeks, European finance ministers have been debating possible alternatives.
At the secret meeting on Friday, May 6, the finance ministers from the large euro countries, ECB President Jean-Claude Trichet and Eurogroup President Jean-Claude Juncker convened at the Luxembourg government conference center to discuss the increasingly ominous situation in Greece.
Greek Finance Minister Giorgos Papakonstantinou was also invited. His counterparts had intended to put him back on track, because the Greeks had recently failed to fulfill the internationally imposed austerity requirements.
'Lack of Linguistic Discipline'
The meeting was intended as a forum for issues that the players would normally hardly dare to mention in so much as a whisper. Schäuble had come well prepared. His 150-page folder of talking points included an analysis of the Greek debt situation and a study on additional privatization options, as well as documents on a restructuring of the Greek national debt. The most explosive document was described in the table of contents as follows: "German Background Document: Greece's Withdrawal from the Monetary Union."
When SPIEGEL ONLINE reported on the meeting and quoted from the document, it was Schäuble who suddenly found himself in the dock rather than his Greek counterpart. The other finance ministers accused him of lacking control over his staff. "We are surprised by the lack of linguistic discipline in Germany," one participant complained afterwards. "This isn't the first time that information from Germany has caused problems."
The scenario is by no means an invention by finance ministry officials in Berlin, who, in writing the document, were merely reacting to considerations in Athens, as SPIEGEL learned last week. According to sources within the European Commission in Brussels, the government of Prime Minister Georgios Papandreou had already reviewed the pros and cons of withdrawing from the euro zone some time ago.
The plan is now off the table, and the issue of a debt restructuring was also no longer relevant at the meeting, at least not for the time being. There was too great a fear of upsetting the markets even further, after the news of the secret meeting had been leaked.
Athens Seeking Better Loan Terms
Instead, Athens asked for better terms. It argued that the debt burden could be made more tolerable if the interest rates were reduced once again and the periods of the bailout loans were extended.
The representatives from the donor nations responded coolly to the idea. New concessions, they said, would only be an option if the Greek government tightened its reform efforts even further, despite strikes and mass demonstrations. First Greece would have to sell off additional government assets and thereby raise up to €50 billion. Because the program is not making any headway, Schäuble is already thinking of sending privatization experts from his ministry to Athens as advisors.

The participants spent hour after hour arguing, so that by the end of the meeting they were only able to agree to stick to the current bailout program: No reduction in the Greek debt, but possibly new loans in return for additional austerity requirements. Meanwhile, the currency crisis continues to smolder. But hardly anyone believes anymore that Greece can avoid a restructuring, or a debt haircut. Its mountain of debts has grown to more than 150 percent of gross domestic product this year. Meanwhile, the economy is shrinking, partly because of the austerity measures.
The country is stuck in a vicious circle. Investors refuse to lend Greece money at affordable interest rates because they are convinced that Greece is over-indebted. This forces the government to accept bailout loans from its partner countries, which further increases debt levels while reducing creditworthiness.
No Alternative to More Credit for Athens
If the governments continue to refuse to agree to a debt haircut, Greece will need new help from its partners by next year at the latest. Last Monday, Schäuble told the CDU's executive board that he planned to "stand firm" against such plans for the time being. But in the end, he added, there would be no alternative but to approve additional billions in loans to Athens.
The reason: Without new liquidity injections, the Greeks will have no access to scheduled funds from the IMF, which can only pay out the next tranche from its bailout package if the country can demonstrate that it can service its debts in the coming 12 months.
A joint team from the IMF, ECB and European Commission is currently scrutinizing the progress of the Greek austerity program, but it is already clear that the Greeks are not likely to fulfill the requirements.
Not surprisingly, the mood is tense. Despite all the negative reports, Chancellor Merkel intends to wait until the experts who are now reviewing the situation in Athens have compiled their report. For this reason, she angrily informed European Commission President José Manuel Barroso during his visit to Berlin last Wednesday that she considers the talk in Brussels of new billions in aid to be more than premature.
Meanwhile, a feeling of resignation is taking hold in Greece. When Prime Minister Papandreou announced his rigorous austerity and restructuring program a year ago, he was still confident of having the support of a majority of the population. For many Greeks, the crisis was even an opportunity to finally put an end to an economy that had been based on debt and privileges for decades.
Some Greeks Warming to Idea of Euro Withdrawal
But now large segments of the population favor a quick fix, like the one Vassilis Sarantopoulos, 50, the head of a small Greek publishing company, recommends. The "solution" to Greece's debt crisis is obvious, says Sarantopoulos: "Withdrawal from the euro zone, return to the drachma, non-recognition of the government debt."
This, he says, could "help everyone, Greece and Europe alike."
Sarantopoulos is sitting in Café Kastro in a suburb in northeast Athens, savoring the silent admiration of his friends. He is one of the advocates of a new movement in Greece called "I Won't Pay." The name speaks for itself.
Its members are refusing to pay the price for the crisis. They are hampering the operation of tollbooths on the expressway, taping over coin slots on ticket machines for buses and trains or simply dodging fares. They plan to call for resistance to a patient fee for visiting doctors and they want to organize a tax boycott. The movement already has at least 10,000 members, its organizers claim, noting that "a new committee is added" every day.
A new rage is erupting at the foot of the Acropolis. It includes a few young anarchists, who marched through the streets of Athens throwing stones last week. But most members of the "I Won't Pay" movement are ordinary middle-class people or the unemployed.
They believe that politicians and bankers caused the crisis and should therefore solve it. "This is your crisis, not our crisis," their slogan reads. According to opinion polls, 26 percent of Greeks are now opposed to the European bailout funds.
In the government too, the front opposing a national bankruptcy is crumbling. Former Environment Minister Vasso Papandreou is now openly criticizing her fellow member of the Panhellenic Socialist Movement, or PASOK, Finance Minister Papakonstantinou, saying that he "has no overall plan."
Mimis Androulakis, also a member of PASOK, says that his own government is pursuing an "erroneous treatment concept." And Petros Economou, a fellow member of the PASOK parliamentary group, even believes that the austerity measures have in fact exacerbated the Greek debt problem.
Greek EU Commissioner Maria Damanaki, however, is appealing to her fellow Socialists in the Athens government to tighten reforms even further. "Without radical reforms for a leaner, cheaper and better functioning government, Greece will never see light at the end of the tunnel."
Loss of Faith in Bailout Strategy
Many in the European lender nations, including Germany, are beginning to lose faith in the current bailout strategy. Last Tuesday, displeasure within the CDU/CSU parliamentary group became apparent when CSU parliamentary Peter Gauweiler ridiculed the German government's approach, saying: "The energy concept, the euro rescue -- now we can put everything we decided on last year in a box and write on it: not applicable."
There is growing distrust, particularly toward the so-called European Stability Mechanism (ESM), with which Europe plans to support other crisis-ridden countries like Portugal and Ireland in the future. "The depressing news from Greece shows that the current approach to rescuing the euro isn't working," says CDU parliamentarian Marco Wanderwitz. "This doesn't make approval of the ESM any easier."
Without a sustainable solution for Greece, the other bailout funds won't work
either, says Thomas Silberhorn, a European expert with the CSU. "There is no getting around a debt restructuring for Greece."
Gerda Hasselfeldt, the new head of the CSU parliamentary group, is also distancing herself from the current Greece strategy. First it will have to be determined whether Athens has complied with the requirements of the stability program, she says. "If the requirements are not met, no funds will be disbursed."
Schäuble's notorious secretiveness is also causing problems. Last week Gunther Krichbaum (CDU), the chairman of the Committee on European Affairs in Germany's parliament, the Bundestag, complained in a letter to Schäuble that parliamentarians had not been given a current version of the ESM treaty. It was "unacceptable," he wrote, that the Bundestag members "have had to ask their Austrian counterparts for copies of the various drafts."
The growing dissatisfaction within the coalition isn't just jeopardizing the future ESM crisis mechanism, but also the government itself. The number of euro skeptics within the coalition's junior partner, the FDP, is far greater than in the CDU/CSU. In the last few weeks, 14 FDP politicians have already announced their intention to vote against the ESM. If only seven CDU/CSU parliamentarians were to join them, the government would no longer have a majority and would be require the opposition's approval -- spelling complete humiliation for the chancellor.
Backup Plan
The risk of this happening is so great that the leaders of Berlin's coalition government are now prepared to make concessions. Finance Minister Schäuble, for example, proposes giving parliamentarians a greater say in decisions related to future ESM loans.
And in the case of Greece, his officials have come up with a backup bailout plan that makes at least some allowances for the gloomy realities. Under that plan, the European Financial Stability Facility (EFSF) would approve a loan for Greece. The Greek government could use the money to buy up old bonds still on the market, which are currently trading at about 60 percent of their face value. The operation would be worthwhile for Athens, because the EFSF charges lower interest than the market and offers a more favorable repayment period.
The deal would also offer advantages for the bond issuers. They would still receive 60 percent for their old bonds, which would probably be more than they would get in the case of a severe debt haircut.
Last week, a senior representative of the German Finance Ministry indicated tentative support for this solution in a meeting with the financial experts of the coalition parliamentary groups. "There are economic reasons to suggest that such an instrument could make sense," he said. But he also pointed out that a large-scale repurchase program could not receive majority approval within the coalition or in Europe at the moment.
It would be a step in the right direction, albeit a hesitant one. Hendrik Enderlein, a professor at the Hertie School of Governance in Berlin, is now convinced that Athens needs forgiveness of "at least 50 to 60 percent of its debts," but adds: "This cannot be achieved by extending loan periods or with repurchase programs."
Oxford economist Clemens Fuest agrees. "Europe's governments must face reality," says Fuest, a member of the Academic Advisory Board at the German Finance Ministry. According to Fuest, Europe cannot "keep behaving as if Greece were not insolvent, while constantly imposing new burdens on taxpayers for the bailout."
Schäuble's predecessor has agreed with the economists' insights for some time. "The question is no longer whether Greece will restructure its debt," says former Finance Minister Peer Steinbrück, a member of the center-left Social Democratic Party (SPD), "but when."
Translated from the German by Christopher Sultan.

Note: The viewpoint expressed in this article is solely that of the writer / news outlet. "FATA Awareness Initiative" Team may not agree with the opinion presented.

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