Workers and trade union representatives from all over Europe demonstrate against austerity outside the European Commission headquarters in Brussels on Feb. 29, 2012. Demonstrations took place in several capitals around Europe urging EU leaders in summit on Thursday and Friday to focus more on growth than spending cuts.YVES HERMAN
Satyajit Das is author of ' Extreme Money: The Masters of the Universe and the Cult of Risk'
Following protracted negotiations, the Greek government agreed on a new Greek austerity package. The bond exchange is likely to proceed with bond holders' suffering losses of more than 70-75 per cent.
The Troika – the European Union (EU), European Central Bank (ECB), the International Monetary Fund (IMF) - needs to reduce the level of Greek debt to a "sustainable" 120 per cent of gross domestic product (GDP) by 2020. The bond deal and the latest budget cuts are designed to achieve this, paving the way for a second financing package for Greece to enabling it to repay a €14.5-billion bond on March 20. Deterioration in Greece's finances required the bigger writedowns and greater budget cuts.
But even the greater austerity and larger losses to lenders will probably leave Greek debt above the target level, requiring delicate financial engineering to at least cosmetically reach the target. In the end, even with a dollop of wishful thinking and economic gymnastics, the projected debt figure came in at 120.5 per cent in 2020.
The 120 per cent level is largely meaningless, being a political construct designed to avoid drawing unwelcome attention to Italy, whose debt levels are around this level.
There is no certainty that the agreement reached can be implemented. The IIF represents around 50 per cent of banks and investors. The deeper losses will increase resistance to the deal, especially from hedge funds who may prefer to take their chances in a default.
One option is to unilaterally insert collective action clauses (CACs) into existing bond contracts, allowing a supermajority of lenders to bind the minority. A complicating factor is the ECB's refusal to take losses. With direct holdings of Greek bonds of €40-billion as well as additional loans to banks secured over Greek bonds, the ECB's capital of €5-billion (scheduled to increase to €10-billion) is insufficient to absorb losses. As the CAC would force the ECB to share in losses, a special arrangement will exempt them from the effects of any CAC to the further detriment of already resistant private lenders.
Any agreement is also likely to face legal challenges from lenders, which would complicate proceedings.
Another complication is the extremely tight timetable that must be followed to ensure the arrangements are implemented in time.
This agreement is unlikely to be the definitive resolution everyone seeks. Greece has consistently failed to meet economic forecasts. Greece's financial position will deteriorate and it will miss key milestones – debt levels, budget deficits, asset sales and structural reforms.
In the end, Greece may live to default another day. History suggests that a writedown of debt for distressed borrowers is frequently followed by others.
With Greece increasingly doomed, the real significance of the negotiations is that they provide a template for future European sovereign restructurings. No one buys the oft-stated European leaders' position that Greece's position is unique or exceptional. Portugal is first in the line of fire, with the Irish, Spanish and Italians watching anxiously.