After weeks of deliberation, EU officials finally announced the much-awaited details of Greece’s second bailout. The country will be given financial aid amounting to 130 billion EUR until 2014, which means that it will have enough cash to cover for the 14.5 billion EUR bond payment due next month. Whew!
Recall that the Greeks moved heaven and earth just to get the EU-IMF-ECB tandem, otherwise known as the Troika, to give them another bailout. The government had to pass another set of austerity measures which includes job and salary cuts and pension reforms just to make the Troika say yes.
1. Private bondholders have yet to agree to a write-down.
Greece is not out of the woods yet. It still has to convince private bondholders to a 52.5% haircut on the face value of Greek government bonds. In case you don’t recall, that’s bigger than the 50% write-down that investors agreed to back in October 2011.
On top of that, investors will have to exchange their existing bonds for securities that have lower interest rates. Talk about giving up a ton of profits! What are the odds that bondholders would actually agree to that?
Now the ball is in the hands of the Institute of International Finance (IIF) which represents the private sector. Some market junkies think that getting them to say yes is a tall order for the debt-ridden country. In the event that they don’t agree to these terms, Greece might not get any financial aid from the Troika!
2. Could the Greek austerity measures be too much?
There is too much focus on cost-cutting austerity measures at the expense of Greece’s economic growth. A few economic gurus even argue that the second bailout could actually do the country more harm than good in the long run.
The Greek economy is already struggling neck-deep in a five-year long recession. Heck, its unemployment rate is already topping 20%! With the new set of austerity measures aimed to reduce government spending even further, we could see the country fall into economic depression and become incapable of supporting itself.
3. Bailout is just a quick-fix and debt contagion is still a possibility.
Don’t forget that the Greeks basically sold their souls to the Troika as they agreed to follow extremely strict austerity measures just to get the bailout funds released. Failure to adhere to this agreement could force their creditors to withdraw their funds, which could send Greece’s debt-to-GDP ratio back to 160% in 2020.
If that happens, Greece would fall short of the IMF’s imposed 120% debt-to-GDP target and be left with no choice but to ask for yet another bailout package. In this case, Greece would be unlikely to repay its loaned funds from several euro zone nations, increasing the risk of debt contagion.
4. Latest bailout deal must be approved by ALL euro zone parliaments.
Just when it seemed like the worst was already over for Greece’s bailout negotiations, some euro zone nations expressed their disapproval about it. Bear in mind that, even though euro zone finance ministers already gave the green light for another Greek bailout package, national parliaments of the euro zone member nations have yet to give the go signal before the funds are actually released.
It doesn’t help that Germany, the Netherlands, and Finland are on the fence when it comes to approving the bailout deal. With that, Greece could still have a lot of nail-biting to do as the Dutch and German Parliament are set to conduct their respective debates before voting on the Greek bailout next week. Meanwhile, Finland hasn’t set a date on their vote yet, which means that the Greek debt deal is actually far from being a done deal.
In a nutshell, all these reasons show that Greece has several hurdles to clear before actually receiving the bailout funds. Even if they do receive the funds sooner or later, it still can’t guarantee that the Greek debt crisis is over.
If anything, the latest tranche of bailout funds simply buys Greece more time. Some compare it to replacing the band-aid on an old wound or treating the symptoms and not the cause of a worsening disease. At the end of the day, it could only be a matter of WHEN Greece would ask for more funds again.