Expectations are high for the signing off of the second bailout for Greece on Monday, February 20th. This has helped the euro recover.
Yet there are ominous signs that this is not the case. Another delay on Monday has higher chances, as well as an outright default. Perhaps plans are already in place. Here are 5 reasons:
- Target Not Reached: The whole idea of the second bailout, including the haircut for private bondholders, is to put Greece on a path of reaching a 120% debt-to-GDP ratio in 2020. European leaders were reportedly accepting 125%. The head of the Eurogroup, Jean-Claude Jucker, said that we are “far away” from reaching that goal.
- Lower IMF Contribution: Up to now, the International Monetary Fund has contributed a third of the bailout funds. It is now cutting its funding to only 10%. It seems that the US, who is the greatest contributor to the IMF, is cutting its losses.
- War of Words: The German frustration from Greece is more public. German finance minister Wolfgang Schäuble said that Greece is bottomless pit. He is one of most pro-Europe and pro-euro politicians on the scene. His Greek counterpart, Venizelos, said that “some euro-zone countries don’t want us”. This escalation does not contribute to a deal, to say the least.
- Preparing the public after preparing the banks: There is a growing chorus in Europe that says that “now is a better time for a default”. This is based on the success of the ECB’s LTRO. Banks have much better cushions to absorb the shock of a Greek default. The ECB lent them 489 billion euros. A second operation is planned for February 29th. The Poles said it out loud, and also Italy’s PM Mario Monti hinted that it would be wiser to invest in Italy rather than Greece.
- Plan for Grefault on March 23rd: There are reports about documents outlining the details of a Greek default when markets close on Friday, March 23rd. According to these reports, US banks are getting ready for a Greek exit from the euro-zone. Greece has until March 27th to repay around 14.5 billion euros. The due date is March 20th + 7 days of grace.
The ECB is swapping its bonds to ones that would not suffer “Collective Action Clauses” (CAC) in order to avoid the fate of bonds under the Private Sector Involvement (PSI).
This was seen as a preparation for the second bailout deal to be finalized. It seemed as a step forward and sent the euro higher.
Well, this also could be a preparation for a Greek default, if negotiations aren’t finalized, or fail altogether. Update: More evidence about the plans made in Wall Street is emerging. This is bad for the euro.
- Without a Marshall Plan for Greece – There’s No Hope
- EUR/USD Forecast – All about the pair.