Financial Times
July 12, 2011
Wasn’t the big Greek vote for austerity last month supposed to bring calm to the financial markets?
Indeed it was, because it solved the most immediate problem – the risk that Greece would be unable to make a large debt repayment in mid-July and would therefore default on its sovereign bonds. When Athens passed the measures, the European Union and the International Monetary Fund agreed to send €12bn in bail-out aid to Greece, keeping its financial head above water for another three months.
However, the EU was also expected to agree to a second €115bn bail-out that would ensure Greece would be able to continue making its debt payments through to mid-2014. So far, however, eurozone states have not been able to agree the deal.
What’s the hold up?
A group of creditor countries led by Germany want private bondholders to bear some of the burden of the new Greek rescue, perhaps as much as €30bn. But any move that forces bondholders to accept less than they were originally promised by Athens is, by definition, a default – and markets fear that any default by Greece will set a precedent for the rest of the eurozone. That fear is now pushing up borrowing costs for Spain and Italy.
So the German-led group has been locked in negotiations with major banks, represented by the Institute of International Finance, to work out a way for them to delay redemptions on a big portion of their Greek bonds.
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