Deal on Greek debt looms but drama not over

opinion February 14, 2012 00:00

By Duangkamon Phunkaew

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For much of last week and this week, market participants have tied their attention to Greek debt crisis resolution.

The seemingly endless Greek drama appears to have moved in a positive direction, after the parliament passed even stricter austerity measures on Sunday in order to avoid defaulting on a ¤14.43-billion debt bill due on March 20, and to secure a second ¤130-billion bailout from the European Union and the International Monetary Fund. 

    The latest austerity measures aim to reduce Greece’s debt to GDP ratio to 120 per cent by 2020, lower the fiscal budget by another 1.5 per cent, slash the private sector minimum wage by 22 per cent, cut 150,000 public sector jobs by 2015, and sell off more public assets. 
     Euro-zone finance ministers are set to meet in Brussels tomorrow – the deadline for reaching agreement and signing on this deal. The finance ministers gave an obvious signal that the agreement will move forward once the Greeks figure out precisely how to make the ¤325 billion of savings required. The Greek parliament approved the loan agreement in a vote on Sunday, and the major Greek political parties have pledged to implement the deal whatever the result of April’s general election.
In the meantime, after long discussion, private creditors agreed to accept an average coupon as low as 3.6 per cent on new 30-year bonds in the debt swap deal, which is an agreement to reduce privately held debt by ¤70 billion from a total of ¤206 billion. Accordingly, the additional ¤30 billion in cash will come from the bailout fund, which adds up to a total debt reduction of ¤100 billion. 
But despite some positive signs, investors still need to be cautious, especially on political issues relating to the upcoming Greek election in April, and the Greek Labour Unions strike. Moreover, the ¤130-billion bailout package may be insufficient in the medium term. Further, the euro zone remains under pressure from the fragility of the Greek debt crisis and the possibility that other European countries could follow in Greece’s footsteps. 
Duangkamon Phunkaew is a senior dealer in the Treasury Division of Bangkok Bank. Views expressed are the writer’s own.