Greek Prime Minister Lucas Papademos along with Cabinet members over the weekend identified an additional €325 million in budget cuts for the troubled country. The announcement comes as Greece looks to secure a new round of bailout loans from the ECB, International Monetary Fund and other central banks to avoid default ahead of a scheduled $18 billion bond payment to private bondholders set for March 20th.
A week ago, Greek officials approved a new round of austerity measures aimed at reducing Greece’s sovereign expenses. The country may also lay off as many as 15,000 federal employees in 2012.
Payment to Private Creditors
Papademos reportedly told ministers that “a series of additional measures amounting to €125 million in order to complete the package of budget cuts worth €325 million” had been identified. Negotiations between Greece and its private creditors have been ongoing for over a month as the two sides battle for leverage.
In early February, rumors swirled that Greece and its bondholders were close to a deal that would exchange previously issued bonds for new coupons worth approximately half of their face value along with an average interest rate payment of 4 percent. However, the IMF and Germany then began pressuring the creditors to take an additional haircut which would result in close to a 75% loss of original face value. Talks subsequently broke down.
Fears of Default
Fears of default are rampant among some investors who believe Greece will ultimately be forced to refuse payment to its creditors once its options to secure future lending have run their course. Credit ratings agencies have opined that if private creditors are forced to take too much of a discount on the debt they hold – an amount that has been undesignated so far – that Greece would be considered to be in default. The term “in default” is important in that it could trigger Credit Default Swaps once a country officially refuses to pay its sovereign debt.
Rising borrowing costs for fellow EU nations such as Portugal have all but ensured that Greece will not be the only sovereign country facing debt concerns in 2012 and beyond. Despite the 2009 creation of the European Financial Stability Facility, few believe that bailout fund will be able to do much if sovereign debt concerns spread throughout the European Union.
U.S. Treasuries
The United States has benefited from a massive diversion of assets into U.S. Treasury notes as investors seek a perceived “safe haven” for their fiat currencies, commodities, equities and bonds. Ten-year U.S. Treasury yields have been hovering close to 2 percent while yields for many EU nations are closer to 10 percent due to bond purchasers’ demand for higher interest rate payments.
The Bailout Question
Greece has experienced a growing amount of civil unrest including riots and violence as a number of citizens protest austerity measures that its government is implementing in exchange for bailout loans. While some believe that bailouts are the only means for a country to avoid an official default while it seeks to reign-in sovereign spending and increase revenue, others argue that placing financial burdens on future generations of a country’s population is immoral and that the overall debt will only continue to increase.
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