The Greek Crisis Resurfaces

The batch of downgrades on European credit, delivered over the weekend by Standard Poor’s ratings agency, prompted angry threats that Europe would have to create its own ratings agencies to bypass the American ratings agencies. The downgrades made yesterday’s credit and recovery plan calculations obsolete by increasing the cost of borrowing for nine European countries.

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European countries were not given an opportunity to vent their anger and frustration. because the old nemesis. the threat of a Greek default flared up again. George Osborne. British Chancellor of the Exchequer, urged his European colleagues to forget the downgrades and concentrate on the Greek crisis. The fear is that a Greek default could set off a panicky chain reaction engulfing Spain and Italy, whose debt situation is too enormous to salvage.

The crisis has arisen because the proposed solution for Greece was a compromise between a massive bailout and the willingness of private creditors to take a “haircut” in repayment terms for their previous loans to Greece. It is the latter half that is becoming unhinged. The plan was to swap the bonds coming due for new thirty year bonds. The issue is now the interest rates to be paid on the new bonds. The interest that Greece is willing to offer on the new bonds is below what the private investors are willing to accept because it would translate into more than the 50% haircut that was agreed upon.

The deal has to be wrapped up to make sure that Greece can make repayments on €15 billion of debt by mid-March. This is not something that can be done at the 11th hour, but must be settled within the next week or two.

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Some experts are predicting that Greece will default, becoming the first developed country to do so in nearly 60 years. The creditors sought the intervention of the German and French governments.

German Foreign Minister Guido Westerwelle met with top officials on Sunday to goad Greece into carrying out its reform pledges, including the sale of state assets. Back in Berlin, Chancellor Angela Merkel, while conceding that austerity in the first stage would hamper growth, nevertheless argued that history had shown  that after a difficult first phase “very strong phases of growth, after a certain phase of recession.” Greece would therefore have to persevere.

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