A Crisis Averted in Greece, but More Problems Lie Ahead

"If all goes according to plan, the Greek parliament’s approval of new austerity measures at the end of June, followed by the euro area’s disbursement of the fifth tranche of the current Greek Loan Facility, will then lead to approval of the latest rescue of Greece by the International Monetary Fund (IMF) Board, just in time to provide a baptism by fire for Christine Lagarde. One of Lagarde’s last major responsibilities as French finance minister will have been to participate in the eurogroup finance ministers’ conference call to seal this deal. (Presumably she was calling from Washington, DC, where she was preparing to take over the IMF the first week of July.) One of her first actions as managing director of the IMF will be to oversee the board’s approval of these same financing commitments. As a lawyer, Lagarde says she can seamlessly review the facts from different institutional perspectives. As a result, disbursement of the fifth aid tranche to Greece now seems virtually certain before July 15th.

The latest crisis has been averted. But multiple obstacles remain in the months and years ahead.

Principally, there is the issue of the "private sector involvement" (PSI) to reduce the Greece’s financing burden in 2012-13. The eurogroup signaled its intention [pdf] in this regard, by promising to "define the modalities for voluntary private sector involvement with a view to achieving a substantial reduction in Greece’s year-by-year financing needs, while avoiding selective default."

Their intention to bring about a "substantial reduction" in Greek financing needs, however, conflicts with the goal of avoiding a "selective default." Inevitably, the larger the PSI, the higher the chance for a selective default declaration by the credit rating agencies. It was not unexpected, for example, that Standard &Poor (S&P) would label the "voluntary" rollover of debt [Morningstar subscription required] by the French Banking Federation (FBF) and other creditors as amounting to "a default under our criteria."..."

at  http://www.piie.com/realtime/?p=2245&utm_source=feedburner&utm_medium=%24%7Bfeed%7D&utm_campaign=Feed%3A+%24%7Bupdate%7D+%28%24%7BPIIE+Update%7D%29