The question of the day…for the last two years: Are the EU leaders ready to bailout Greece or throw her under the bus?

Posted on February 16, 2012

The Euro zone financial officials and the EU political leaders are exploring ways of delaying some components of the second bailout package for Greece, or even delaying the entire bailout altogether,  while they try to avoid a disorderly default. According to EU sources, the postponement could extend until April, when Greece holds their parliamentary elections. There are proposals to put off the Greek rescue program or to divide it, so that a default could be avoided. Under this split scheme, a debt swap agreement between Greece and the private sector bondholders could be carried out . The critical problem with dividing the program is whether the private creditors would be willing to take the risk of not knowing if the second major part of Greece’s financial package would be put in place. Without the total plan, Greece may not be able to make future bond payments.

The dissatisfaction expressed by Germany, Finland, the Netherlands, and others was conveyed in the proposal to hold up the bailout plan. Recent financial data from Greece showed its economy shrank 7% in the last quarter of 2011, indicating that it will be  much more difficult for Greece to achieve its pledged debt targets.  After two years of repeated assurances to pull Greece back from the precipice of default, European leaders are at odds between pouring more money into a besieged economy or risking an unpredictable sovereign bankruptcy.  That could coerce Greece out of the euro zone, and augment increased market tension and debt contagion. Ultimately, the concern is whether Greece has the national political will to stay the course and fulfill their commitments.  Even though many of the details of the agenda have been acceded to, the necessary private bond exchange has come to a halt due to broader quarrels between EU and Greek leaders. EU officials say Greece needs to demonstrate additional assurances of promised reforms, in order to receive the next 130 billion euro aid package. According to these officials, “Greece has depleted its credibility by missing targets for deficit reduction, economic reforms and asset sales that were set when it obtained a 110 billion euro aid package in May 2010.”  An outcome from Greece’s failure to implement some of their promised goals, has given rise to the once unthinkable prospect of their exit or ejection from the euro zone.

As negotiations over the second rescue program have run into new hurdles, Greece believes the more thriving European countries are “playing with fire” by contemplating the idea of expelling it out of the 17 nation euro zone.  Greek Finance Minister Evangelos Venizelos publicized this accusation after a decision on the aid package scheduled for Wednesday night (February 16th) was postponed until at least February 20th, and possibly until a new Greek government is elected later in the year. The Finance Minister told reporters “we are continually faced with new terms. In the euro area, there are plenty who don’t want us anymore.” Europe and Greece are in dangerous territory. Their actions and mutual reluctance to back off is bringing default closer to fruition. The frustrated attitude from EU leaders, and Greece’s ” enough is enough” resistance, is getting to a point where conjecture and reality come together.

As this crisis is turning into a catastrophe the world’s financial markets are getting hammered, not weekly, not daily, but minute to minute. The moment a finance minister, EU official, or even an anonymous aide releases an update or issues a statement, the one predictable consequence you can count on is over reaction, volatility, and instability in the global bond and stock markets, and explosiveness in the foreign currency world. If you want to know how the sovereign debt negotiations are faring….just check the currency market.

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