Troika report key to rethinking Greek haircut: officials

Reuters News
Posted: Sep 30, 2011 9:49 AM
Troika report key to rethinking Greek haircut: officials

By Jan Strupczewski

BRUSSELS (Reuters) - The next international inspectors' report on Greece's progress toward its fiscal targets will play a crucial part in any re-examination of private sector involvement in the second bailout package for Athens, euro zone officials said.

The report from the International Monetary Fund, the European Central Bank and the European Commission -- the 'Troika' of lenders -- could be ready in 2-3 weeks.

It will show if Greece met conditions for the next 8 billion euro tranche of aid under the existing loan plan, without which it will default next month.

Officials said that if Greek growth forecasts in the report were revised down, Greek revenue projections would be cut too.

As a result, Greek financing needs would be bigger than foreseen on July 21, when EU leaders agreed on a 109 billion euros new bailout framework from public funds, on top of a private creditor contribution via a bond exchange which would inflict 21 percent losses.

"The framework conditions might have changed since the last review was done and the Greek growth forecast also," one euro zone official said. "When we put all of that together we have to see what kind of conclusions will be drawn."

Officials said if faced with higher financing needs, euro zone governments would be unlikely to agree to shoulder the extra burden alone and could ask private Greek bond holders to contribute more than the already agreed 21 percent haircut.

"This is a discussion that is taking place," a second euro zone official said.

Greek Finance Minister Evangelos Venizelos was reported last Friday as telling lawmakers he saw three scenarios to resolve the debt crisis, including one involving an orderly default with a 50 percent haircut for bond holders.

"Nobody knows how much bigger the involvement could be. It could come much closer to the market rate possibly. There has been talk about 50 percent, but that does not mean anything," the second official said.

"The issue is whether the current approach leads to a viable solution or not. Currently there is no definite view on that -- it is for the Commission, IMF and ECB to say whether it is possible or not possible," the official said.


The "troika" inspectors forecast in early June that the Greek economy would contract 3.8 percent in 2011 but grow 0.6 percent in 2012 and 2.1 percent in 2013.

But Venizelos told the Greek parliament on September 15 that Greece would remain in recession for a fourth year in 2012.

"If the troika says that Greece will not return to growth until 2013 or 2014, the assumptions of the second bailout from July will have changed," a third euro zone source said.

"The additional funding needs can either be shouldered by the governments, which is politically very difficult, or shared with the private sector," the official said.

The publication of the "Troika" report is likely to coincide with the completion of the ratification process of new operational powers for the euro zone bailout fund, the European Financial Stability Facility (EFSF).

Once Slovakia approves it, something it has pledged to do before October 17, the 440 billion euro EFSF will be able to extend precautionary credit to governments under market pressure like Spain or Italy, buy their bonds on the market and lend to governments to recapitalize banks.

With such instruments in place, the euro zone would be better equipped to handle potential contagion effects from a Greek technical default, to which a renegotiation of the private sector haircut would amount, officials said.

"The deeper haircut is a rating or credit event that would be selective default or default by the rating agencies," a fourth euro zone official said.

"The July 21 agreement was carefully crafted to limit to the extent possible the potential duration of a ratings downgrade -- anything that goes beyond that entails different consequences in terms of a downgrade, but it does not mean that Greece will not pay its bills anymore," the official said.


The last Troika report from June said "debt restructuring in Greece would have a severe contagion impact on other EU sovereigns."

The report said that countries with high, but not obviously excessive, debt levels could face a significant increase in risk perceptions by creditors, which could "tip the balance into illiquidity, even without a change in the underlying fiscal position of the countries concerned."

But officials said that since June the atmosphere has changed and many politicians were now openly talking about the possibility of a Greek default, previously taboo.

"The benefits of the voluntary private sector involvement deal can be questioned when you look at the final figures -- if it makes sense from the governments' point of view," a fifth official said.

"Greece will get the sixth tranche of aid because nobody wants Greece to default in two weeks," the official said. "But then we might be in for some reopening of issues that were settled already in the summer, in October and possibly also in November," the official said.

"I don't have any high expectations for any of the upcoming meetings, not the Eurogroup on October3, not the Eurogroup on October 13 and the European Council on the 17th. I think the crunch time will be in end-October and November," the official said.

(Reporting By Jan Strupczewski; Editing by Mike Peacock)