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06/09/2011 12:05 PM

Troika Report

Greece Needs a New Bailout

ByStefan Schultz

The troika of the European Commission, European Central Bank and IMF

has prepared a sobering report on Greece's efforts to combat a debt

crisis. The document, which has been obtained by SPIEGEL ONLINE,

concludes that Athens will not be able to return to capital markets in

2012 and a further massive bailout will be needed soon.

It may be just nine pages long, but the report by the European Commission,

European Central Bank (ECB) and International Monetary Fund (IMF) packs a

punch. According to the keenly awaited report, which has been obtained by

SPIEGEL ONLINE, it is unlikely that Greece will be able to return to borrowing

money on the capital markets in 2012 as previously foreseen -- meaning

European taxpayers will probably have to prop up Greece with billions in

payments for much longer than was originally planned.

The troika's prognosis is bleak. Although there is some evidence that "the

rebalancing of the economy is ongoing and the quarter of deepest contraction

(has) already been passed," the report warns that "a further contraction in real

GDP is still expected in the second half of 2011." The real GDP growth rate for2011 is now protected to be minus 3.8 percent, the authors conclude, adding

that positive growth rates are not expected before 2012. Even then, they will only

be "moderate."

The current negative outlook presents the troika with a major challenge. The

IMF's statutes stipulate that the organization can only lend a country money if it

is certain that the state will be able to meet its payment obligations for the next

12 months.

The new report has now made it clear that Greece is not in a position toguarantee that, meaning that the IMF cannot transfer any more money while

there is still a chance of Greece defaulting within the coming 12 months. "Given

the remoteness of Greece returning to funding markets in 2012, the adjustment

program is now underfinanced. The next disbursement cannot take place before

this underfinancing is resolved," the report concludes.

This in turn means that Europe will have to come up with a new rescue package.

German Finance Minister Wolfgang Schuble estimates that Greece will need 90

billion ($132 billion) to cover its funding needs between 2012 and 2014,

according to government sources quoted by the news agency DPA on Wednesday

evening. Luxembourg Prime Minister Jean-Claude Juncker, who is head of the

Euro Group, has also mentioned the same figure. On Wednesday, following a

telephone conference of euro-zone finance ministers, Juncker said that Athens'


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privatization plans should bring in 30 billion, covering one-third of the needed

funds.

But a new bailout for Greece could be a tough sell for the euro-zone member

states, which will have to get their national parliaments to approve a new

package. The German government will find that especially difficult, given

domestic resistance to providing Athens with more funds.

Fears of another Lehman

In May 2010, the European Union and the IMF put together a 110 billion rescue

package for Greece. The original bailout plan foresaw Greece returning to capital

markets in 2012. Until then, the so-called troika of the European Commission,

ECB and IMF needs to transfer money to the highly indebted state at regular

intervals. Without this support, Greece would effectively be bankrupt. Presently,

few investors are willing to lend the country money, and those who are would

demand a staggeringly high interest rate of 15 percent. Investors consider the

risks to be too great.

Many experts believe that a Greek default could have horrendous consequences,

with some even fearing it would cause the breakup of the euro zone and lead to

turmoil in the financial markets. The fallout might even exceed the impact of the

Lehman Brothers bankruptcy in 2008, which triggered the global financial crisis.

According to the troika report, it will be difficult for Athens to regain the

necessary investor confidence that would allow it to borrow money on the capital

markets. "The recession appears to be somewhat deeper and longer than initially

projected," the report reads. The country's gross domestic product (GDP) shrunkby 4.5 percent in 2010, the authors write, more than had been assumed at the

start of the rescue efforts.

The EU-IMF aid is paid out in tranches, with each new installment dependent on

Athens meeting certain conditions in sorting out its finances. But reforms aimed

at reducing the country's huge levels of public debt -- which currently stands at

around 350 billion -- have stalled. Although the Greek government made a

"strong start" in reducing its macroeconomic and fiscal imbalances, the

implementation of necessary reforms has come to a "standstill" in recentquarters, the report reads. Greater efforts are needed to combat the country's

rising public debt, the troika says, arguing that structural reforms that would

underpin the economic recovery need to be stepped up.

In 2010, Greece's budget deficit was equivalent to 10.5 percent of GDP -- way

over the 3 percent allowed under euro-zone rules. But Athens is struggling to

reduce its debt burden, because tough austerity measures are hindering the

economic growth that is necessary to generate tax revenues. "If no action was

taken, the government deficit in 2011 would remain close to the 2010 level," the

report reads.

Private Creditors Bailing Out

Meanwhile, the German government, which had said it would wait for the


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publication of the troika report before deciding how to proceed, has been trying

to win support for a new rescue package for Greece. On Wednesday, Chancellor

Angela Merkel and Finance Minister Schuble argued in favor of a new bailout

during a meeting with the parliamentary groups of the governing parties -- the

conservative Christian Democratic Union, its Bavarian sister party the Christian

Social Union and the business-friendly Free Democrats -- according to

participants quoted by DPA. Merkel also expressed her support for Schuble's

initiative to involve private creditors in a new rescue package.

The only problem is that there are fewer and fewer private creditors to involve.

Private institutions are selling off Greek government bonds on a large scale amid

fear of a default or a so-called haircut. It is mainly public institutions such as

Germany's state-owned regional banks and the European Central Bank who still

hold Greek bonds.

According to a report in the German daily Die Welt, German insurance companies

now only hold 2.8 billion in Greek debt, down from a total of 5.8 billion just a

year ago. Similarly, German banks have sold off around a third of their Greekdebt since May 2010, according to new Bundesbank figures quoted by the

Financial Times Deutschlandon Thursday. German banks only held around 10.3

billion in Greek bonds in January and February 2011, compared to 16 billion in

April 2010.

URL:

http://www.spiegel.de/international/europe/0,1518,767559,00.html

RELATED SPIEGEL ONLINE LINKS:

Berlin Warns of Possible Greek Insolvency: German Finance Minister Calls for Athens

Debt Restructuring (06/08/2011)


Desperate Bid to Cut Deficit: Greek Privatization Plan Faces Massive Domestic

Resistance (06/07/2011)


Dignity and Democracy: Escaping the Clutches of the Financial Markets (06/03/2011)http://www.spiegel.de/international/europe/0,1518,766518,00.html

The Haircut War: Tensions Worsen Between Berlin and European Central Bank

(05/30/2011)


Interview with EU Currency Commissioner Rehn: 'There Is a Certain Aid Fatigue in

Northern Europe' (05/30/2011)


Consequences of Debt Restructuring: What Would a Greek Haircut Mean for Germany?

(05/27/2011)


SPIEGEL 360: The Euro Crisis

http://www.spiegel.de/international/topic/euro_crisis/

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