By Juergen Baetz Wednesday, 28 September 2011
German Chancellor Angela Merkel hinted that the second Greek bailout package might have to be renegotiated amid increasing market speculation today that European leaders want to force private holders of Greek bonds to take bigger losses.
Merkel didn't rule out altering the terms to the €109 billion ($148 billion) package, saying the decision must be based on how Greece's debt inspectors, the so-called troika, judge Athens' recent austerity efforts.
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"So we must now wait for what the troika finds out and what it tells us: do we have to renegotiate or do we not have to renegotiate?" she said in an interview with Greece's ERT television Tuesday night.
Merkel added that she "cannot anticipate the result of the troika."
Greece was saved from default last year by an initial €110 billion bailout, and the planned second rescue package includes a voluntary participation by private bondholders, who agreed to write off about 20 percent on their Greek debt holdings.
But many economists and analysts maintain that Greece — mired in a deep recession worsened by the same austerity measures implemented in return for bailout loans — must have its total debt reduced by as much as 50 percent if it is to have a chance of recovering.
The Financial Times reported that as many as seven of the eurozone's 17 members want the banks to take a bigger hit on their Greek bond holdings to allow this to happen.
Citing unnamed senior European officials, the newspaper said Germany and the Netherlands are at the forefront of the calls for the private sector to take a bigger hit, with France and the European Central Bank said to be fiercely resisting the move.
Greece "will not get back on its feet without a serious reduction in debt," said Ottmar Issing, a former chief economist of the European Central Bank, who has served as an adviser to Merkel in the past.
Athens needs to see its debt cut "at least 50 percent, probably more," Issing was quoted by Germany's Stern magazine.
Germany's banking association insisted there was no need to renegotiate the terms of the second bailout package. Banks in Germany and France are among the biggest holders of Greek bonds.
Greece's international debt inspectors will return to Athens on Thursday after they suspended their review of the country's finances early this month amid talk of budget shortfalls.
Once the fact-finding mission has made its conclusions, the finance ministers of the eurozone will organize a special meeting in October to assess them.
A positive review is required before the troika — the IMF, ECB and European Commission — can release the next batch of rescue loans Greece needs to avoid bankruptcy.
In Athens, another 24-hour public transport strike left commuters struggling to reach work without buses, subway services, taxis or trams.
Greeks have been outraged by the announcement of new austerity measures — including pension cuts and a new property levy — after more than a year of spending cuts and tax hikes.
Deputy Prime Minister Theodoros Pangalos said he will be unable to pay the new emergency levy without selling property, and argued the country's ability to pay additional taxes to cover budget gaps has been "exhausted for some time."
To help Greece and restore confidence in the euro, Jose Manuel Barroso, who heads the executive European Commission, said the 27-nation EU must develop a stronger central government.
"If we do not move forward with more unification, we will suffer more fragmentation," he told the European Parliament in Strasbourg, France. "I think this is going to be a baptism of fire for a whole generation."
"Today, we are facing the biggest challenges that this union has ever had to face throughout its history — a financial crisis, an economic and social crisis, but also a crisis of confidence," Barroso said.
The crisis, which began in Greece some 18 months ago, eventually spread to engulf Portugal and Ireland, which also needed bailouts. It now threatens to mushroom further, prompting criticism from analysts and leaders including President Barack Obama that the EU is acting too slowly.
Among the most important measures that European countries have been slow to clear is a proposal to give the eurozone's €440 billion bailout fund more powers — the ability to buy government bonds, bail out banks, and lend to troubled governments quickly before they are in a full fledged crisis. Lawmakers in Germany will vote Thursday, while Finland's parliament approved the move on Wednesday.
The proposal, along with Greece's second bailout, was agreed by eurozone leaders on July 21. But the delay in voting and implementing the decisions spooked financial markets in recent weeks.
In the meantime, the ECB has shouldered the burden, buying over €150 billion ($205 billion) in government bonds to drive down borrowing costs for Italy and Spain.
Fears that the eurozone's third and fourth largest economy, Italy and Spain, may get sucked into Europe's debt crisis had stoked concern they would lose access to market funding and be forced into requesting bailouts.
A default by Greece or another country would send shock waves through the global economy, particularly in Europe, authorities fear. Banks would suffer such large losses on government bonds they hold that they would cut off credit to the wider economy and cause a new, sharper recession.