August 16, 2022

New Rescue Package for Greece Takes Shape

While the agreement for as much as €60 billion, or $86 billion, would, in theory address Greece’s need for cash this year and next, it puts off for the time being a restructuring, hard or soft, of Greece’s mammoth debt burden.

At the deal’s heart would be an informal understanding that the private sector holders of Greek government bonds might be persuaded to roll over their debts, or extend new loans at the time their older obligations come due.

By taking on more dubious Greek risk — backed by new funds from Europe and the International Monetary Fund — exposed banks would not just step back from the precipice of a “haircut,” or a forced loss on their bonds, they might also hope that in another two years, Greece will be in a better position to repay its debts in full.

The expectation that Europe will again come to Greece’s rescue bolstered both the euro and equity markets on Tuesday. Yields on Greek 10-year bonds have dropped sharply, to 15.7 percent Tuesday from a high of 16.8 percent last week.

“Restructuring is off the table,” said a senior official in the Greek Finance Ministry. “For now it is all about growth, growth, growth.” This person, who spoke on condition of anonymity while the talks continued, said an announcement from the European Union, the I.M.F. and the European Central Bank could come as soon as Friday or early next week.

Later in June, the E.U. first and then the I.M.F. would approve the additional financing, thus clearing the way for €12.5 billion to be disbursed to Athens at the end of the month.

The new loans, however, will only be forthcoming if more austerity measures are introduced.

Along with faster progress on privatization, Europe and the fund have been demanding that Greece finally begin cutting public sector jobs and closing down unprofitable entities.

They also have been pushing Greek politicians to unite behind the new austerity package to help ensure it sticks, and are discussing a decrease in the value-added tax as a concession to win support from the right-of-center opposition, which wants more tax relief to help the moribund economy.

A team of bankers and technical experts from the international institutions have been on the ground in Athens for close to a month, attempting to reconcile the essential conundrum of Greece’s financial condition.

Harsh austerity measures have taken a severe toll on the economy, resulting in missed financial targets and the need for more public money.

Adding to the urgency has been the persistent flow of deposits out of the banking sector. Since the crisis began, €60 billion in deposits have been withdrawn from Greek banks, about a quarter of the country’s output. Bankers in Athens said that outflows were particularly severe last Thursday and Friday following comments — later described as rhetorical — by a Greek politician about Greece leaving the euro.

With great reluctance, European governments have come to the conclusion that an additional €60 billion now, while politically unappealing, would be less costly than the unquantifiable public funds that would be needed if a restructuring of Greece’s debt produced a Lehman Brothers-like contagion that spread not just to Portugal and Ireland but possibly Spain and the financial system as a whole.

But how an economy already in free fall will generate the growth to produce the needed budgetary surplus to start paying down its debt remains unanswered.

“Greece’s G.D.P. is already declining and now the government will need to cut another €7 billion in spending,” said Jason Manolopoulos, who manages a hedge fund based in Athens and Geneva and is the author of “Greece’s ‘Odious’ Debt: The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community.”

“That is only going to make the debt to G.D.P. figures worse,” he said. “There is no getting around it: Greece is insolvent.”

With a debt of 150 percent of gross domestic product, or G.D.P., that may well be so. But while skeptics like Mr. Manolopoulos are keeping the cash levels in their funds high, convinced that Greece will be required to default sooner rather than later, such a sense of pressing gloom has not yet become contagious.

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