Although credit ratings agency S&P downgraded the sovereign debt ratings of nine Euro zone nations, including France, Italy and Spain, on Friday, attention in Europe has shifted again to the weakest member of the currency bloc, Greece.
Talks between Greek officials and private banks on how to tackle Athens’ seemingly insurmountable mountain of debt broke down on Friday, prompting fears of an imminent default and a subsequent spillover-effect across the continent.
Moreover, an exit from the euro by Greece appears likelier by the day.
Greek officials are frantically seeking a deal to enact a bond swap scheme with banks in order to avert a default when $14.6-billion euros ($18.5-billion) of bond redemption become due on March 20. Athens has sent a delegation to Washington to meet with International Monetary Fund (IMF) officials to find a solution to the deadlock.
However, Greek Prime Minister Lucas Papademos told CNBC television that he is optimistic his government can arrive at a deal before time runs out.
There is a little pause in these discussions, he said.
But I am confident that they will continue and we will reach an agreement that is mutually acceptable in time.
Also of pressing concerns – senior officials from the IMF, European Central Bank (ECB) and European Union (EU) are due to arrive in Athens by the end of the week to deliberate on details of the next 130-billion euro bailout. A pact on the aforementioned bond swap must be reached before that time.
Concerns are growing that Greece cannot meet the terms of the bailout, and that it will need even more injections of cash to stave off bankruptcy.
The terms of the prior EU bailout envisioned that holders of Greek bonds would accept a 50 percent “haircut” on the value of their holdings -- this figure was believed to be sufficient to reduce the country’s debt burden down to 120 percent of GDP by the year 2020 – from 160 percent currently.
However, the continued deterioration in Greece’s economy and a higher-than-expected 9 percent budget deficit for 2011 might make that target impossible to reach.
London-based Capital Economics Ltd. believes that Greece will depart the euro sometime this year, followed by other smaller Euro zone nations in 2013.
“But a bigger break-up is possible given the precarious state of Spanish and Italian public finances and the absence of an agreed strategy even to finance a temporary bail-out,” CE noted.
Meanwhile, Britain’s Chancellor of the Exchequer George Osborne warned Monday that Greece’s precarious financial condition poses more of a direct threat to Europe than the S&P downgrades.
I would say almost more so than the downgrading, the ongoing uncertainty about how they are going to write off some of the private sector debt in Greece is an almost greater source of instability at the moment in the euro zone, Osborne told BBC.
Indeed, in mid-Monday trading, European equity markets are moving higher, suggesting that the downgrades by S&P were already expected and priced in by investors.
Osborne added that European leaders need to implement a coordinated effort to save the euro currency.
What the euro needs to do is to show convincingly that it can stand behind its currency, he said.
We haven't actually seen much evidence of the pooled resources needed by the euro to actually provide confidence to the market that they will stand behind their own currency.
Osborne again suggested that his government might consider providing more money to the International Monetary Fund (IMF) in order to help support the euro.
Britain has always been prepared to provide resources in the past and will be willing to provide resources in the future if there is a strong case, the Chancellor stated.
However, given the fragile state of many European countries, pledging yet more money to Greece would likely be politically unpopular.
Germany, the most powerful European country by economy, is adamant that Greece abides by terms of the previous bailout in order to reduce its debt.
Germany's foreign minister Guido Westerwelle told Greece’s Skai television: We don't want only a hint of a temporary recovery supported by banknotes. We want structural reforms so that Europe does not face a similar situation in the future.