When the European Union and the International Monetary Fund agreed in July to provide a second bailout for Greece, this debt-ridden Euro nation, as well as the rest of the Eurozone, saw some hope of salvation and the possibility of being able to avoid a default.
However, debt crisis fears rose again last Friday based on fears that Greece might not receive its scheduled installment of bailout money from the IMF and the European Union.
This fresh speculation regarding Greece defaulting arose after the IMF and EU officials who were in Athens earlier this month, left unexpectedly, reportedly because of the Greek government’s lack of progress on declared deficit reduction plans and doubts with the government meeting conditions for the next tranche of its 2010 bailout plan.
The Euro reacted to this by falling to a 10-year low versus the Yen, while sinking 1.6% against the Dollar.
Investor Fears
Nervousness among investors regarding the Greece debt situation seems to stem from a number of fears including those over whether a desired share of the country’s private sector investors have been incentivised to participate in proposed debt swap arrangements.
The before-term resignation announced by Jürgen Stark, European Central Bank’s chief economist, on Friday furthered uncertainty fears among investors along with an increasing loss of confidence in the ability of EU leaders arriving at a long-term solution to Greece’s debt problems.
These fears were further fuelled by a report which said that German officials are putting together a contingency plan to protect the country’s banks in the eventuality of Greece defaulting on its debt.
The over-riding fear of course, is that the debt crisis will affect the other weak Eurozone countries, like Italy and Spain, and will eventually mean one or more of these EU nations abandoning the euro.
With investors reacting to these fears and uncertainties by resorting to safe-haven assets, Treasuries and German bonds fell to record-lows.
Fresh Promises v/s Skeptics
The 109 billion Euro bailout package for Greece that the EU agreed to in July needs to be approved by the individual governments of all seventeen countries within the Eurozone.
However, the targets set for Greece’s debt and deficit reduction, under this bailout plan extended by the EU and IMF, have reportedly not been met as desired, leading to the EU, IMF leaders leaving Athens earlier this month.
In response, debt-laden Greece has made fresh promises towards debt reduction, with Evangelos Venizelos, Greek Finance Minister, announcing plans on Sunday to slice an extra two billion Euros off the country’s deficit. These funds will reportedly be raised through a real estate tax and a month-long salary cut for elected officials.
On the other hand, experts from the Eurozone, as well as from all over the world, have voiced their skepticism regarding Greece being able to avoid a defult scenario.
Philipp Roesler, Germany’s Economy Minister, wrote in a column for the daily Die Welt on Monday that “To stabilise the euro, we must not take anything off the table in the short run… That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available.”
Echoing Roesler’s sentiments, Jan Kees de Jager, Dutch Finance Minister brought up possibilities of giving defaulters the boot from the euro, saying that “If you can’t stick to rules, you have to leave the game.”
Finland and Slovakia have expressed their doubts regarding Greece’s ability to avoid default, with the former having made clear that it would require cash collateral from Greece before lending any more money, and the latter threatening to prolong approval of the second rescue until year’s end.
