Greece is grabbing the headlines once again, and everyone eagerly awaits the results of the longest debt negotiations in the history of mankind. At least it feels that way. According to Bloomberg, "A formal offer on the terms of the voluntary debt swap is due by Feb. 13, according to the Greek finance ministry."
At stake is the 130 billion euro package that Greece needs to keep afloat, although that's another truck load of money to be added to the never ending debt pile. By some estimates, Greece's GDP contracted 6% in 2011 and unemployment is around 20%, yet there's an expectation that the money being funneled to the country's coffers will be paid in the future.
The negotiations center around a 100 billion euro haircut - plus 10, minus 10, it doesn't matter anymore - and then another 130 billion will be wired to replenish the funds. In brief, cut existing debt while simultaneously expanding it. Never thought that I would live to see anything like this.
MarketWatch reported that the ultimatum is in, and Greece must deliver - whatever it is that the country must deliver.
"If we determine that everything is going wrong in Greece, then there won't be a new program, and that means in March you'll have a declaration of bankruptcy," said Jean-Claude Juncker, prime minister of Luxembourg, in an interview published Sunday by Germany's Der Spiegel magazine. Juncker chairs meetings of eurozone finance ministers.
Mr. Junker is certainly closer to the action, but plenty of people, thousands of miles away, can inform him that everything is already going wrong in Greece, because one can only cut back so much without turning the country upside down. This is not a defense of how Greece got here, but rather an acceptance of the current condition. Yes, we can agree on the facts that contributed to Greece's economic demise, but trying to squeeze every cent from a virtually destitute population will not end well. The Economist provided a glimpse.
A necessary fiscal squeeze is adding to the downward spiral and risks becoming self-defeating. The sorts of public spending that are likeliest to induce other economic activity, such as road-building, have been cut, says Mr Stournaras. Big tax increases are not a sure-fire way of raising revenue in a country where taxes are routinely avoided. The rate on restaurant meals was raised from 11% to 23%; such a sharp jump seems almost an invitation to cheat for cash-strapped small businesses. The IMF says a shortfall in VAT receipts suggests some firms are not complying. A hike in car taxes prompted many drivers to hand in their license plates.
The damage is done. It's time to swallow the bitter pill, and move on, while keeping in mind the lessons learned. Thus, the focus of this second bailout is well defined, and according to ekathimerini, "Merkel, Sarkozy propose separate account for bailout money."
Only a few days after controversial German proposals to install a budget commissioner in Greece, French President Nicolas Sarkozy and German Chancellor Angela Merkel suggested on Monday that if Greece secures a new bailout, the money it receives should be paid into a special account from which bondholders will be paid directly.
In short, the proposal would create an escrow account and the Greek government would not be in charge of paying the bondholders, which is a subtle manner of installing a budget commissioner. Certainly the money will find its way to Greece, one way or another, and the much dreaded eventual default will be postponed for as long as possible. If necessary, Merkel and Sarkozy will pull out their personal checkbooks and pay the bondholders.
I cannot know with certainty who's responsible for holding up the negotiations, but my gut tells me that the Greeks are, only because they have the upper hand. Furthermore, the idea presented by Merkel and Sarkozy emphasizes that the process is designed to save Europe, not Greece. There's that old saying that if one owes $1 to the bank one is a debtor. But if one owes $1 billion, one is a partner - and the Greeks know that.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
