Greece: Here's The Deal (Well, sort of…)

The European governments agreed over telephone Sunday to offer Greece 30 billion euro in funding this year. In addition, the IMF is supposed to contribute with at least 15 billion euro. But the Greek government have not yet officially asked for the money, and it’s still not enough to cover the nation’s total borrowing needs over the next 12 months. How much money Greece actually will need over the next 2 to 3 years is still unclear.

“There will come a point when the E.U. will no longer be in a position to help, even if it wants to.”

Wolfgang Münchau

The deal became possible after Germany gave up its insistence of Greece to pay market rates. According to evrointelligence.com German chancellor Angela Merkel and her advisers had been digging in until late Thursday, but were finally persuaded to accept. An IMF delegation is to arrive in Brussels to negotiate the next steps, including the final size of the package, and further details.

The E.U. contribution will be €30bn in 2010. E.U. officials say IMF contribution will be €15bn, but details have yet to be worked out, and IMF says the size of its contributions depend on the situation and what Greece, not the E.U., is asking for.

The IMF’s participation might therefore be higher than €15bn.

IMF-boss Dominique Strauss-Kahn says IMF stands ready to make a credit facility available for several years.

Interest rates are based on Eurepo, plus margins, and will add to about 500bp for a three-year loan.

Lending will be in both variable and fixed rate notes. Funding amount will not cover Greek borrowing over the next 12 months.

Here’s the full statement made by the E.U. ministers Sunday.

Greece has not yet made an official request for aid.

The decision has Monday lead to a rally in both European and Greek assets.

Still Not Enough

It is a three years package. It is not clear yet, how much Greece might need in 2011 and 2012.

Greek finance minister George Papaconstantinou said the government plans to go ahead with debt sales, including a dollar-denominated bond, without taking up the offer for aid.

Financial Times columnist Wolfgang Munchau welcomes the fact that there is a deal, that is more the original amount, that it is not at market rates, but believes that this is probably not enough to save Greece from Bankruptcy.

The adjustment burden is simply too big, he argues. Also, this deal, and the way it was struck, and structured, cannot conceivably serve as a crisis resolution regime. Munchau draws the analogy with Bear Stearns and Lehman, and says Greece is a Bear Stearns, and Spain/Portugal may be a Lehman.

“It is still not a coherent policy. Many questions remain. For example, what will happen if Greece fails to repay the loan? Will the bond market interpret the deal as a sign that the EU will not let anyone fail who acts in good faith? Or will it start testing the E.U.’s solidarity for Portugal and possibly even Spain or Italy? There will come a point when the EU will no longer be in a position to help, even if it wants to,” he writes.

“The cost of the Greek bail-out is not high, compared with the hypothetical alternative of uncontrolled Greek default inside the euro zone. Portugal is a smaller country than Greece, in terms of gross domestic product, but Spain is the euro zone fourth-largest economy, with an annual GDP of more than €1,000bn ($1,350bn, £875bn) at current market prices. Is this going to be a sovereign-level re-run of the bail-out decision taken by the US government in respect of Bear Stearns and Lehman Brothers? Will Greece be lucky because it was the first ones to receive help, while Portugal and Spain, like Lehman beforehand, will enjoy no such support?”

“It is impossible to answer these questions. But it is evident that whatever will be agreed will only apply to Greece. The E.U. has still not provided a generalized crisis resolution regime. I suspect that smart investors know that.”

Nightmare Not Over

The Financial Times Lex-team points out that the Greek nightmare is far from over.

“After all, debt is still about 120 per cent of output. Now, all eyes will be on George Papaconstantinou, the finance minister, as he attempts to convince 11m Greeks to embrace austerity. Measures to reduce the deficit from 13 per cent to 8.7 per cent this year include a 10 per cent cut to government salaries – a tough pill to swallow. But the benefits are clear. Ireland, which slashed its spending last year, has seen spreads on its 10-year debt stabilize at about 150bp above German bunds. Only six months ago, Greece’s were the same but have since almost tripled. Returning to more manageable levels will follow if it can finally put its house in order. With the bail-out agreed, there are no excuses left.”

Jean Quatremer at liberation.fr says it was a shame that this agreement took so long, but he said in the end it was always clear that the EU would do the right thing, and not let any of their members fail.

This is something that the euro-skeptics have persistently misjudged.

Trichet: Some Countries Will Have To Accept Deflation

In an interview with Il Sole 24 ore, Friday, ECB-boss Jean-Claude Trichet says to regain competitiveness, some countries will have to keep inflation below the EU average for a sustained period.

When asked, whether this would include accepting a period of deflation, he replied with a Yes.

“It is normal that some regions, after growing above the EMU average for some time, and after having accumulated high national inflation, experience a correction and therefore a period of negative inflation, as it is currently happening in Ireland.”