Today, on June 1st, the EU Finance Ministers are to hold a special meeting in Vienna in order to decide on whether to bail out Greece once again. The final decision should (and will) be made until June 20th. Otherwise Greece will automatically default on its debt.
Now it is obvious that last year’s salvation plan (including a €110B loan to Athens lent by the EU and the IMF) has failed –Greece won’t obviously be able to solve its debt problems until March 2012 in order to attract funds on its own. In this case the IMF won’t be able to support Athens anymore and the bailout of Greece will entirely become the EU’s problem.
What is Greece for the EU? Is it a touchstone for improving the mechanism of solving the future problems connected with the Euro currency or a quagmire that Europe has got into?
Is the government helpless?
The experts of the West-European Association of Traders and Investors under remind that a year ago Athens promised the EU and the IMF to reduce its budget deficit down to 3% of the national GDP by 2014. The first wakeup call was heard in late 2010 when the budget deficit of Greece reached 10.5% while the sovereign debt was equal to 142% of the GDP. This year the experts expect the debt to exceed 160% of the GDP and reach 170% in 2012. For the sake of comparison, the average sovereign debt for the Euro-zone members is 96%.
The Greek government is trying to change the situation:
· They have developed a privatization program, which is expected to bring almost € 50B by 2015.
· They have already put for sale the shares of some Greek ports and telecommunication companies.
· The government keeps freezing pensions and salaries and cutting bonuses and social benefits.
· Last week an austerity package was adopted. It is expected to reduce the spending by € 6B, which will allow Greece to reduce its budget deficit by 7.5%.
· The ECB Council member Lorentso Bini assumes that Greece is solvent.
However, the experts of say that the government’s efforts are being smoothed as the Greek population keeps opposing the austerity measures and reforms. Some Citigroup analysts consider the political confrontation between the government and the country’s people, political parties and labor unions to be the main brake on the economic recovery of Greece.
In order to achieve a compromise with the opposing political parties the Greek government asked the EU, the ECB and the IMF to approve the reduction of the value-added tax from 23% down to 20%. Strange as it may seem, but according to Reuters, the Greek government got the approval.
During the entire spring the financial circles heard rumors that Athens would ask the EU and the IMF to restructure its debts. The rumors in the media were disproved by both the sides. However, if to avoid debt restructuring, it will be necessary to provide Greece with another multi-billion loan. Germany and other EU members opposed it.
According to Reuters, on May 25th the EU's Fisheries Commissioner Maria Damanaki said: "We either agree with our creditors on a program of tough sacrifices, that brings results, and assume the responsibilities for our past, or we return to the drachma. The rest is secondary under today's conditions". The experts of are divided in their opinion: some say this is blackmail, others say that Greece really has no choice. However, all the experts admit that after Damanaki ‘s statement EUR instantly declined against USD while most investors switched from the Euro bonds to the US T-bonds.
Debt restructuring: pros and cons
A month ago it seemed that the debt-restructuring option would be more preferable as many EU members opposed new loans and it would be difficult to collect the necessary amount of money for it.
However the opponents of debt restructuring have their own arguments:
· Jean-Claude Juncker, President of the Euro Group, completely excluded the option.
· Angela Merkel assumes that one cannot shift the goalposts. Greece got the loans under certain conditions and should do its best to meet them otherwise it can undermine the trust and confidence in the Euro-zone.
· The ECB repeatedly stated that the restructuring of the Greek debt would become a disaster for the entire Euro-zone.
· Moreover, in this case both the Euro-zone members and the ECB will lose on it because in 2010 the central bank bought Greek bonds to the amount of € 45B.
· If the EU agreed to restructure the Greek debt, the IMF would stop any financial support of Greece, including the €12B loan expected scheduled for June.
· The world’s major rating agencies announced that the restructuring of the Greek debt would be automatically considered as the country’s default.
That is why the European financiers probably chose the second option (grinding their teeth), i.e. they decided provide Athens with another loan. The crucial point was Germany’s approval to allocate the funds. The new loan is estimated at € 60-70B.
Help in exchange for loss of sovereignty?
Greece will receive another loan from the EU - €12B - in exchange for “external management”, i.e. the EU gains control over Greece’s taxes and privatization program. In other world, in this case Greece will have to lose a part of its sovereignty.
Some experts of assume that this is an indicative situation, which gives Portugal and Spain to understand what they will face if they fail to solve their debt problems.
What if Athens rejects the financial aid under such conditions? Greece will inevitably default. The problem is that the “domino principle” may take effect in this case.
EURUSD perspectives:
According to the Department of studying Masterforex-V trading system , EURUSD has made an upward FZR 1.4443 around - bullish wave с(с)Н2. The Fibonacci retracement grid is built on W1 while the momentum grids are built on А Н2,а(С)Н2.
The closest upward objectives:
1.4458 -50%,123.6%
1.4480 -138.2%
If there is a bearish swing breaking below 1.4390, wave с(С)Н2 will be completed.
Market Leader and Masterofrex-V Academy would appreciate if you could share with others your own opinion on the matter. Just visit the Academy’s forum for traders and investors and answer the following question:
Will the EU eventually save Greece from default?
· No, it won’t. The Greek economy is in agony.
· Yes, it will. However the solution is temporary and Greece will eventually default on its debt in the foreseeable future.
· Yes, it will. Europe will do everything that will be needed to preserve the integrity of the Euro-zone.
