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Greece in race against time to avoid default
Question of the Day
ATHENS — Greece resumed talks with its international debt inspectors Tuesday, facing a race against the clock to avoid becoming the first country that uses the euro to default on its debts and potentially trigger a chain reaction that could ultimately destroy the European single currency itself.
The debt inspectors — whose mission chiefs are expected in Athens Friday after technical teams lay the groundwork — face a massive task. They have to once again find more ways to cut spending and raise revenue in a country that is increasingly seen as immune to fundamental reforms.
Apart from identifying financial shortfalls produced since their last visit in December, they also have to set up a detailed policy and spending program for the next two years if Athens wants to have a chance at securing an extra euro130 billion ($166 billion) in rescue loans. Those loans were promised in October, after it became clear that a first euro110 billion bailout granted in May 2010 was not enough to buffer a Greek economy in freefall.
While they go through Greece’s books, the government in Athens is also locked in a battle to convince banks and other private bondholders to forgive half of the Greek debt they hold — an essential part of the second rescue package.
At the same time, the head of the European Union’s task force for Greece is also in the capital, looking to streamline the country’s sprawling bureaucracy, trying to improve lax tax collection and kickstart stalled infrastructure projects.
For the Greek government, the stakes could not be higher. The country has to repay a euro14.5 billion bond in March — one that it can’t afford to pay. Negotiations with the bondholders on the bond swap — and ideally the troika — have to be concluded by Jan. 30, when European leaders meet in Brussels to scrutinize the deal.
The crucial bond swap negotiations with the Institute of International Finance, which represents bondholders, stalled on Friday after a sudden disagreement arose with other eurozone countries and the IMF over the interest rate on the new bonds.
Talks will resume Wednesday, the IIF said, which went on to press the “sense of urgency” over the need for a deal. However, it was not clear whether positions had moved closer together since last week. After Greece’s economy shrank almost 6 percent last year, the official lenders are trying to cap the amount of money they have to pump into the country.
Time is running short. Ideally, a final outline of the debt deal should be reached by the end of this week, with a formal public offer at the beginning of February, a senior Greek finance ministry official said last week. Only then will Greece know how many bondholders are actually willing to participate voluntarily.
If the agreement goes ahead, it would both reduce the amount the country has to pay on its debt and extend the maturity date, giving the country much-needed breathing space. If it doesn’t, it puts into question the entire second bailout and makes the possibility of a messy default alarmingly likely.
Such is the scene in Athens these days, almost two years after a new government called for international help to plug a budget deficit that was much bigger than expected. Since then, the troika has flown over more or less every three months, checking on progress and often coming back disappointed.
Each time their visits have grown longer, the debate over yet more austerity measures more acrimonious, and invariably, a broad selection of workers go on strike. Yet resignation has set in among many Greeks, who see no particular result arising from labor walkouts and demonstrations that often turn violent.
“The potential ramifications of a Greek disorderly default are so negative it is still likely that some kind of agreement will be reached,” said Gary Jenkins, director of Swordfish Research. But “the fact that such a scenario is possible after all the bailouts and talks will probably continue to be a drag on confidence even if the problems are resolved.”
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