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Sisyphean burden

16 January 2012 By Hugo Dixon

Watch Athens more than Standard & Poor’s. The biggest source of immediate trouble for the euro zone could be the one country the ratings agency didn’t examine in a review that led to the downgrade of France and eight others states. Even if the short-term shoals can be navigated, the rest of the zone won’t find it easy to get shot of Greece.

The points S&P made when stripping France and Austria of their triple-A ratings and knocking two notches off the ratings of the likes of Italy and Spain were valid. It is true, for example, that policymakers can’t agree what to do to solve the euro crisis and that “fiscal austerity alone risks becoming self-defeating”. But these points, as well as the prospect of S&P downgrades, were already in the market.

Meanwhile, what Mario Draghi said last week about “tentative signs of stabilisation” is true. The European Central Bank, over which Draghi presides, is itself partly responsible for that stabilisation by virtue of providing 489 billion euros of three-year money to banks just before Christmas. Mario Monti’s promising beginning as Italy’s prime minister is the other main factor. The Super Mario Brothers have got off to a good start.

In Greece, though, matters go from bad to worse. The economy, which shrank about 6 percent last year, is now forecast to shrink another 4 percent or so by Credit Suisse and Goldman Sachs – even worse than the International Monetary Fund forecast in November. What this means is that the numbers behind the latest bailout plan cum debt restructuring are probably out of date.

The immediate problem is corralling private-sector bondholders to swap 206 billion euros of bonds for new paper nominally worth half that value. There are actually two problems: persuading the negotiators for the bondholders to accept a deal; and then getting virtually all the bondholders themselves to agree.

Despite the brinkmanship, which led the negotiators to leave the talks on Friday, it is likely there will be a solution – albeit a messy one. If the negotiators eventually agree, recalcitrant bondholders can be roped in by retroactively inserting collective action clauses in their contracts. If the negotiators don’t agree, there can be a formal default with losses imposed on everybody by diktat.

The snag is that restructuring the private-sector debt wouldn’t remotely close the Greek dossier as far as the rest of the euro zone is concerned. The question would then be whether to provide Athens with a bumper 90 billion euro tranche of bailout cash in March. The previous tranches have been much smaller: December’s, for example, was only 8 billion euros. But the debt restructuring means the next tranche has to be supersized: up to 40 billion euros is required to recapitalise the country’s banks, whose balance sheets will be shot to bits because they are up to their gills in their own government’s bonds; a further 30 billion euros is needed as a sweetener to persuade the private bondholders to agree the restructuring.

Politicians elsewhere will not find it easy to write the Greeks such a mega cheque. There was much wrangling even before the smaller previous tranches, given that Athens’ finances were always worse than expected and that it was never delivering on its promises. This time not only is serious money at stake; there will soon be an election which could bring in Antonis Samaras, the mercurial leader of the country’s conservative New Democracy party, as prime minister. He has been reluctant to embrace the austerity-cum-reform programme that the euro zone and IMF want the country to follow.

Lending Greece such a huge sum when it’s not on track and it’s about to have an election would be risky. But the alternative would be for the whole programme to fall to pieces. And despite the recent signs of stabilisation that Draghi spoke of, other euro zone countries aren’t yet ready for an uncontrolled Greek default. So the best bet is that they will hold their noses, fudge things and hand over the money.

But that wouldn’t be the end of the trouble either. The continuous bailouts mean that the public sector will soon have about 300 billion euros at stake in Greece. This is made up of loans by euro zone countries, loans from the IMF, purchases of Greek bonds by the ECB, loans by the ECB to Greek banks and permission given by the ECB to the Greek central bank to lend yet more money to its own banks.

The rest of the euro zone hasn’t been willing to see Greece default on its debts or leave the single currency because it has been worried about contagion. In future, contagion may reduce. After all, if the current debt restructuring is successfully concluded, there will be less private-sector exposure to Greece and so any second debt restructuring might cause less of an earthquake.

But even if the risk of contagion reduces, the euro zone wouldn’t be able to wave bye-bye to Greece. After all, the flipside of less private-sector exposure will be that vast 300 billion euro public-sector exposure. Politicians – such as Germany’s Angela Merkel, who faces an election in autumn 2013 – won’t want to explain massive losses to their electorates.

In Greek mythology, Sisyphus was condemned to roll a boulder to the top of the hill, only to see it roll all the way down again. It looks like the euro zone will be carrying its Sisyphean burden for a long time.


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