In an unusually harsh warning, German Finance Minister Wolfgang Schäuble said that the euro area could refuse new financial aid to Greece, thus forcing the state to enter into default if Athens does not show Europe that it can keep its promises of economic reform. For the Greek prime minister, international aid deprivation is tantamount to bankruptcy with terrible consequences. “Greece has to decide. Europe is ready to support Greece, but if this state is just about to announce the measures necessary without implementing them, no amount of money will solve the problem”, said Schäuble for the American newspaper The Wall Street Journal.
Greek Prime Minister Lucas Papademos warned that Greece has to face the specter of bankruptcy and “all the terrible consequences” resulting from it. The official believes that there would be no new aid, the state will not be able to pay its debt and will be forced out of the euro area, writes The Telegraph. Moreover, U.S. economist Nouriel Roubini, who predicted the financial crisis, believes that Greece will probably get out of the euro area in the next 12 months and could be quickly followed by Portugal. Roubini, nicknamed Dr. Doom, is known for his pessimistic forecasts.
Mistrust in Greece is paid by limiting the sovereignty
Schäuble’s statements came after German officials have circulated last week, amid doubts that Greece is willing to reduce spending and increase taxes, the radical idea to appoint an “European Commissioner for Budget” with veto power over spending in exchange for Greece international new aid, which would mean giving up partial budget sovereignty of the state.
Greek officials’ reaction was vigorous. Finance Minister rejected the German plan, arguing that it would undermine “national identity and dignity”. Schäuble is considered by analysts as German Chancellor Angela Merkel’s mentor, the politician with the highest EU decision-making power. “Perhaps we and our partners should study options to help Greece in this difficult task in a more strict way”, Schäuble said, referring to his proposal to place Greece under the guardianship of the budget.
German patience is coming to an end
Deteriorating financial situation of Greece and the growing need for funding creates new political tensions in the euro area which are likely to reignite the debt crisis in the region after a period of calm since the beginning of this year. Germany and other northern European countries that are running a surplus, are becoming more nervous because of what they perceive to be failure to bring under control Greek finances, limit public expenditures, improve tax collection system and, in general, follow the austerity measures prescribed by the international creditors.
Eurozone leaders should decide to give the green light by March to the second financing package for Greece, officially at 130 billion euros and involves assuming a loss by private investors. Athens is currently negotiating a 50% restructuring of debt held by these creditors and discussions are in an advanced stage. Some officials, however, considers that Greece would need 140 billion euros. The alternative would be a total default of Greece, which could send waves of panic on European debt markets, resulting in restricting the access to financing for other problem countries, including Italy and Spain. In this context, helping Greece is seen as the lesser evil.
Greece scare Portugal’s creditors
Portugal’s private creditors are concerned that an agreement to reduce the debt of Greece will increase the likelihood that they may be forced to accept losses related to Portuguese bonds, although European leaders have ensured that the agreement with private creditors Greece will be unique and will not be applied to other countries that have financial problems, writes Bloomberg. Portuguese bondholders are skeptical, and the yield of 10-year term securities rose yesterday to a new record since the establishment of the euro area, by 15.78%.
“Portugal’s debt and lack of economic growth are similar to the situation of Greece. The price of bonds falls because it is obvious to everyone that if Greece’s debt will be reduced, the same could happen to Portugal”, said Yannick Naud, who manages assets of $150 million at Glendevon King Asset Management company.
