Thursday, January 29, 2015

Markets tumble as Greek government begins to backtrack on austerity

By Szu Ping Chan, and James Titcomb 28 January 2015

Greek borrowing costs jump and markets tumble as Alexis Tsipras, Greece's new prime minister, vows never to blindly submit to European creditors and government blocks sale of state assets

Greek markets were thrown into deeper chaos on Wednesday as investors feared that the new, anti-bailout government would enact radical reforms that could jeopardise the country’s future in the Eurozone.

The Athens Stock Exchange tumbled more than 9pc, led by a 27pc fall in bank stocks, amid concerns that the Syriza-led coalition could take direct control of the country’s lenders and write off billions of euros in household loans.

Prime minister Alexis Tsipras vowed never to bow to European creditors as the government took steps to wind back austerity by blocking plans to privatise state assets.

Mr Tsipras, who held his first cabinet meeting after being elected over the weekend, said he wanted a “viable, mutually beneficial solution” that would represent a fair deal with its creditors. “Our people are suffering and demand respect... we must bleed to defend their dignity,” he told MPs.

While Mr Tsipras said the Syriza-led coalition would not engage in brinkmanship with European creditors, he added: “We will not continue a policy of subjection either.”

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Mr Tsipras’s comments helped to push up Greek benchmark borrowing costs back above the psychologically important 10pc mark, while European markets also fell. Spanish stocks finished the day down 1.3pc, while France’s benchmark index fell 0.3pc. The FTSE 100 in London closed up 0.2pc, buoyed by a rise in mining stocks.

The Greek government owns a majority stake in three of the country’s four biggest lenders, and traders said there was a risk that the coalition could parachute its own management teams into the banks and take control of the day-to-day running of lenders.

Traders said this would destabilise the banking system and throw the country into fresh chaos if the government conducted a mass write-off.

“Initially there was some hope that the new government would have been a fresh start, but there has been a gradual realisation that this government is not as moderate as some people in the market believed,” said one senior Greek banker. “There are now concerns that the government could be more aggressive in terms of restructuring loans and providing borrower relief. Before the election, there was talk of a potential management change at the banks - it had been discussed before the election by a number of Syriza MPs."

Greek PM Alexis Tsipras gestures next to Deputy PM Giannis Dragasakis as the new government poses for a group picture after the first meeting of the new cabinet in the parliament building in Athens (Photo: Reuters).

Greek banks have lost almost 45pc of their value in the three days since Syriza ascended to power in Sunday’s election as the dual threats of a bank run and the loss of support from the European Central Bank threaten a liquidity squeeze.

The FTSE/Athex Bank Index, a weighted index of Greek bank shares, fell to a new all-time low yesterday. National Bank of Greece, Piraeus, Alpha Bank and Eurobank all slumped further, with €8.2bn wiped off their combined market values since the election.

It came as ministers that they would block the sale of the government’s controlling stake in the Public Power Corporation of Greece (PPC), which runs almost all of the country’s retail electricity market and accounts for about two thirds of the nation’s power output. The move is part of a pledge by ministers to reinstate sacked government workers and restore cuts to pensions.

“We will halt immediately any privatisation of PPC,” said Panagiotis Lafazanis, Greece’s new energy minister. “There will be a new PPC which will help considerably the restoration of the country’s productive activities.”

The government halted the privatisation of Greece’s main port, Piraeus, on Tuesday. Chinese shipping giant Cosco had planned to turn the port into its new European hub.


Reports emerged that €11bn had been taken out of Greek banks in January, with more withdrawals likely amid fears that the life support from the European Central Bank will be switched off.

Suggestions that Greece may turn to Russia for external financing also caused market jitters. Greece raised a formal objection to an EU statement released on Tuesday condemning Russia's alleged involvement in the Ukraine crisis and calling for broader sanctions.

Separately on Wednesday, France's finance minister ruled out further financial relief for Greece, as he insisted that the country's debt burden would not be shouldered by the rest of the Eurozone.

Michel Sapin said that while European creditors would look at reducing the interest rate Greece pays on its debt and the timeframe used for its repayment, cancelling more of the country's loans was out of the question.

“What’s the debt that Greece has? It’s a debt to the ECB, it’s to the European Union, to the countries who have shared the burden. There is no question of transferring (the burden) from Greek taxpayers toward the taxpayers of France, Germany, Slovenia or Spain [...] We are not going to make contributions of that nature," he told RTL radio.

“At the same time obviously there are things to be discussed with the Greek government, to allow them to have a more sustainable debt that’s easier to repay. These are discussions that are normal to have with a country in this situation. “There’s the question of interest rates, there’s the question of the duration of the repayment, there’s the question of growth."

Mr Sapin's comments came after his predecessor, Pierre Moscovici, who currently serves as a European Commissioner, said the EU would seek "less intrusive, more flexible forms of cooperation" with Athens.

The Greek government holds its first cabinet meeting on Wednesday (Source: AP)

"What we all want is that Greece recovers, creating growth and jobs, that it reduces inequality, that it can deal with the problem of its debt and remains in the euro area," he said in an interview.

However, others have taken a harder stance. "The message ‘we want your support but not your conditions’ won’t fly,” said Dutch Finance Minister Jeroen Dijsselbloem. “My message will be that we’re open to cooperation but that the support from Europe also means the Greeks have to make an effort.”

The Institute of German Economic Research (IW), one of the country's leading institutes, suggested that a Greek exit would be preferable to relaxing the country's bail-out agreement.

"If Greece is going to take a tough line, then Europe will take a tough line as well," it said.

Greece's current bail-out programme expires at the end of February, and experts say it is unlikely that any renegotiation would be concluded by then. A further extension would enable the ECB to maintain liquidity support to Greece.

Analysts said reducing interest charges on loans would "significantly help Greek debt sustainability", although it would not provide a long-term solution.

Michel Martinez, an economist at Societe Generale, said:

Quote By way of example, forgiving interest payments on loans from euro area lenders and extending the average loan maturity to 50 years would reduce the effective interest rate from 3pc to 1.5pc over 2014-2022, pushing the Greek public debt ratio down to 125pc of GDP by 2022, close to the IMF target. Yet, the outstanding debt would remain large and probably cap Greece's access to the market. The debt sustainability equation would definitely not be fixed.

However, Mr Martinez said that the losses incurred by countries might not be acceptable:

Quote Lowering the interest rate means incurring losses. In the current programme, 30 year bilateral loans are linked to the three-month Euribor with a 50bp spread. This is a low interest rate compared to the funding conditions of most countries. The actual average lending rate from European Financial Stability Facility (EFSF) is linked to the borrowing cost of the EFSF/European Stability Mechanism (ESM). Easing further debt service costs would imply a willingness on the part of euro area member states to reduce loan charges to below their borrowing costs. Some parliaments may well decide not to participate in such a transfer of resources.

However, he described a Greek exit from the euro as a "lose-lose scenario", and highlighted that a dirty Greek exit from the Eurozone could trigger huge losses for other European states, with a full default costing France and Germany around €120bn (£90bn).

Translations by Bloomberg/Reuters

Markets tumble as Greek government begins to backtrack on austerity - Telegraph