Thursday, June 23, 2011 7:43:47 AM
Some Greeks Fear Government Is Selling Nation
By RACHEL DONADIO and STEVEN ERLANGER
Published: June 22, 2011
ATHENS — They are the crown jewels of Greece’s socialist state, and they are now likely to go to the highest bidder: the ports of Piraeus and Thessaloniki; prime Mediterranean real estate; the national lottery; Greek Telecom; the postal bank and the national railway system.
And then comes the mandated deeper round of austerity measures, which will slash the wages of police officers, firefighters and other state workers who are protesting in Athens, and raise the taxes of citizens already inflamed by a recession-plagued economy and soaring joblessness.
After winning a pivotal confidence vote on his new cabinet on Tuesday, Prime Minister George Papandreou now has an even tougher task: to carry out a radical remedy of forced auctions and fiscal austerity for a sickened economy already in a deep slump.
The European Union, the European Central Bank and the International Monetary Fund, known as the “troika,” say that is the only way out for a heavily indebted Greece, while some economists say the program resembles medieval bloodletting — a dose of pain highly unlikely to revive the patient.
Mr. Papandreou’s first task is to persuade his governing Socialist Party to pass a bill that would save or raise about $40 billion by 2015, equivalent to 12 percent of Greece’s gross domestic product, through wage cuts and tax increases, at a time when the economy is shrinking.
To put that in perspective, spending cuts and tax increases of a similar scale in the United States would amount to $1.75 trillion, considerably more sweeping than even the most far-reaching proposals for reducing the American federal budget deficit. And Greece has promised to generate another $72 billion by selling off prime state assets, which many Greeks consider a fire sale of national patrimony.
While the commitment to austerity will allow Greece access to a fresh infusion of international aid, a growing chorus of economists say that the government’s new program will at best delay default and a restructuring of its debt, which is already more than 150 percent of the country’s gross domestic product. Steeper budget cuts and tax increases, they say, are the enemy of economic growth, which Greece desperately needs to make its debt burden lighter.
“You cannot keep on milking the cow without feeding it,” said Konstantinos Mihalos, the president of the Hellenic Chamber of Commerce in Athens.
In fact many economists fear Greece has already entered a “debt trap,” where paying the interest on its mound of debt requires more and more loans. “The Greeks have been told to accept more of the medicine that has already failed to treat the disease,” said Simon Tilford, chief economist at the Center for European Reform in London.
The Greeks have already reduced their deficit by five percentage points of the gross domestic product, “unprecedented cuts in a modern economy,” Mr. Tilford said. “But the cuts have had a much stronger negative impact on the economy than the troika imagined, and fiscal austerity has pushed the economy deep into recession. Debt can only be paid out of income, and that means growth.”
Greece does not have access to many tools to fight recession, like devaluing its currency or cutting interest rates, at least as long as it remains a member of the euro zone. Its monetary policy is controlled by the European Central Bank.
Some independent economists accept that Greece has no choice but to try a fresh round of cuts. Edwin M. Truman of the Peterson Institute for International Economics in Washington said Greece had to go through more pain because it had run a budget deficit even before making payments on its debt, meaning it needed loans to pay off its loans.
Only after Greece reorganizes its budget, tax collection and labor market and is running a surplus — not including interest payments on the debt — can economists begin to calculate how much in debt payments Greece is actually able to afford, and then figure out how big a debt restructuring it needs.
“As long as they’re running a primary deficit, they need to keep tightening the belt,” Mr. Truman said. “Rescheduling now doesn’t relieve Greece of the burden of fixing the economy to create a surplus.”
It is not getting any easier. In the year since its first bailout, Greece has cut $17 billion through across-the-board wage cuts, layoffs and attrition in its bloated state sector, which employs 800,000 people, a quarter of the Greek work force. But given its recession, the economy shrank and tax revenues fell, meaning that Greece did not meet the original target of a government deficit of 9.1 percent of G.D.P. as agreed with its foreign lenders, prompting them to demand more cuts.
European demands have placed Mr. Papandreou in an increasingly untenable position. He must sell the increasingly restive Greek people on more austerity with no clear signs of recovery. And he has to persuade his Socialist Party on reforms that undo almost everything the party has stood for in the past.
At least one Socialist member of Parliament, Alexandros Athanasiadis, has already announced that he will not vote for the new austerity measures, citing his opposition to selling part of the state’s stake in the electricity utility whose power plants dominate his district in northeastern Greece.
On Wednesday, members of the public power company union, Genop, occupied the Transport Ministry and orchestrated some power failures to protest the sale, which seeks to reduce the state’s stake to 34 percent from 51 percent in the profitable company.
To many Greeks, selling that and many other state-owned companies and assets, even those that currently lose money, is tantamount to a loss of sovereignty — especially if wealthy investors from Germany and the other big European powers pushing austerity of Greece end up purchasing the assets for a hefty discount.
“We’ve always been advocates of privatization because the national state cannot play the role of the entrepreneur and has in fact proven to be a complete disaster every time they attempt to do so,” said Mr. Mihalos of the Athens Chamber of Commerce.
“But at these extremely low levels, especially for those companies quoted on the stock exchange, we have to be very wary,” he added. “If we go by today’s values, as a result of the recession and the crisis the country finds itself in, it will be really selling the crown jewels at a pittance of their cost.”
Mr. Papandreou’s government has not managed to make a convincing case for the sell-off to many Greeks, where the idea of a fire sale has taken hold, setting off a wave of national indignation. “Imagine if you asked me for my apartment, and I gave you the whole building,” said Dorothea Ekonomopoulou, a public school teacher in Athens, as she stood among demonstrators in Syntagma Square this week.
Rachel Donadio reported from Athens, and Steven Erlanger from Paris.
*
Related
Greek Parliament Passes Critical Confidence Vote (June 22, 2011)
http://www.nytimes.com/2011/06/22/world/europe/22greece.html
Derivatives Cloud the Possible Fallout From a Greek Default (June 23, 2011)
http://www.nytimes.com/2011/06/23/business/global/23swaps.html [next below]
Tapped by a Rival, Greece’s New Finance Minister Faces Daunting Task (June 23, 2011)
http://www.nytimes.com/2011/06/23/business/global/23euro.html
Major Banks and Insurers Are Asked to Assist in a 2nd Greek Rescue Package (June 23, 2011)
http://www.nytimes.com/2011/06/23/business/global/23banks.html
Interactive Maps: Debt Rising in Europe
Greece is not the only country in Europe with problems with credit and debt. (June 16, 2011)
http://www.nytimes.com/interactive/2010/04/06/business/global/european-debt-map.html
*
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/23/world/europe/23greece.html [ http://www.nytimes.com/2011/06/23/world/europe/23greece.html?pagewanted=all ]
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Derivatives Cloud the Possible Fallout From a Greek Default
"There is lack of transparency and visibility in these products, and that increases the risk," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, a boutique banking firm in New York.
Jin Lee/Bloomberg News
By LOUISE STORY
Published: June 22, 2011
It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.?
No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate.
In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders.
The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis. The American insurer needed a $182 billion federal bailout [ http://www.nytimes.com/2010/06/30/business/30aig.html ] during the financial crisis because it had insured the performance of mortgage bonds through derivatives and could not pay on all of them.
Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among nonbank entities like insurance companies and hedge funds.
Asked about derivatives tied to Europe at a Wednesday press conference, Ben S. Bernanke, the chairman of the Federal Reserve, said that the direct exposure is small but that “a disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices and so on. And so in that respect I think the effects in the United States would be quite significant.”
Derivatives traders and analysts are debating just how much money is involved in these contracts and what sort of threat they pose to markets in Europe and the United States. On the one hand, just over $5 billion is tied up in credit-default swap contracts that will pay out if Greece defaults, according to Markit [ http://www.markit.com/en/ ], a financial data firm based in London. That is less than 1 percent the size of Greece’s economy, but that is a conservative calculation that counts protections banks have in place offsetting their positions, and is called the net exposure.
The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements [ http://www.bis.org/publ/qtrpdf/r_qa1106.pdf ]. The gross exposure of the five most financially pressed European Union countries — Portugal, Italy, Ireland, Greece and Spain — is about $616 billion. And the broader figure on all derivatives from those countries is unknown.
The pervasiveness of these opaque contracts has complicated negotiations for European officials, and it underscores calls for more transparency in the derivatives market.
The uncertainty, financial analysts say, has led European officials to push for a “voluntary” Greek bond financing solution that may sidestep a default, rather than the forced deals of other eras. “There’s not any clarity here because people don’t know,” said Christopher Whalen, editor of The Institutional Risk Analyst [ http://us1.institutionalriskanalytics.com/pub/IRAMain.asp ]. “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”
Regulators are aware of this problem. Financial reform packages on both sides of the Atlantic mandated many changes to the derivatives market, and regulators around the globe are drafting new rules for these contracts that are meant to add transparency as well as security. But they are far from finished and could take years to put into effect.
Darrell Duffie [ http://www.darrellduffie.com/ ], a professor who has studied derivatives at the Graduate School of Business at Stanford University, said that he was concerned that regulators may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default.
Regulators, he said, “have access to everything they need to have. Whether they’ve collected all the information and analyzed it is different question. I worry because many of those leaders have said there’s no way we’re going to let Greece default. Does that mean they haven’t had conversations about what happens if Greece defaults? Is their commitment so severe that they haven’t had real discussions about it in the backrooms?”
Regulators aren’t saying much. When asked what data the Federal Reserve had collected on American financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by Mr. Bernanke [ http://www.federalreserve.gov/newsevents/speech/bernanke20110505a.htm ] in May in which he did not mention derivatives tied to Greece. At the Wednesday press conference, Mr. Bernanke said that commonly cited data on derivatives do not take into account the offsetting positions banks have on their Greek exposures. And with those positions, he said, even if there is a Greek default, “the effects are very small.”
At the European Central Bank, Eszter Miltenyi, a spokeswoman, said: “This is much too sensitive I think for us to have a conversation on this.”
On Wall Street, traders are debating whether the industry’s process for unwinding credit-default swaps would run smoothly if Greece defaulted. The process is tightly controlled by a small group of bankers [ http://www.nytimes.com/2010/12/12/business/12advantage.html ] who meet in an industry group called the International Swaps and Derivatives Association [ http://www2.isda.org/ ].
The process is fairly well developed, but it has been little tested on the debt of countries. For the most part, Wall Street has cashed in on credit-default swaps tied to corporations’ debt.
For most purposes, determining whether a default occurred in a country’s debt falls to ratings agencies like Fitch and Moody’s. But for the derivatives market, a committee of I.S.D.A. makes the call.
If the committee decides there was a default, it passes the baton to Markit, which is partly owned by the banks. Markit holds an auction to determine how much value has been lost on the debt, and that determines how much money is paid out to the parties that purchased the insurance.
Marc Barrachin, who runs the auctions, said there was no reason to worry about the process.
“The process is very smooth, very well understood by market participants,” said Mr. Barrachin, the director of credit products at Markit. “I mean if you go back to 2008 right in the fall, in five days we had auctions for Fannie Mae, Freddie Mac and Lehman Brothers, and two weeks after that you had Washington Mutual. I go back to that period of stress and the orderly settlements of large amounts of credit derivatives, for names that were widely followed, were testament of the efficiency of the auction system.”
In the case of A.I.G., there was not an unwind process run by I.S.D.A. because A.I.G.’s contracts were tied to mortgage bonds. Those sorts of derivatives pay out money over time, whereas derivatives tied to a country’s debt pay out on one occasion: if a default occurs. That makes sovereign derivatives more similar to derivatives on corporate bonds and different in some ways from the situation at A.I.G.
But the smoothness of the process would be irrelevant if the risk were concentrated in just a few weak institutions.
The uncertainty around how a sovereign default would course through the derivatives market had greatly increased the price premiums banks were charging to put on new derivatives trades related to European countries. As of last week, the price to insure against default on $10 million of Greek debt was $1.9 million per year, up from $775,000 a year ago, according to Markit.
“There is lack of transparency and visibility in these products, and that increases the risk,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman [ http://www.bbh.com/index.shtml ], a boutique banking firm in New York.
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/23/business/global/23swaps.html [ http://www.nytimes.com/2011/06/23/business/global/23swaps.html?pagewanted=all ] [comments at http://community.nytimes.com/comments/www.nytimes.com/2011/06/23/business/global/23swaps.html ]
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Greece and You
Editorial
Published: June 21, 2011
The euro-zone bailout of Greece is, in good part, a bailout of European banks. In France and Germany alone, banks hold some $90 billion worth of public and private Greek debt. The European Central Bank also holds Greek government debt, and the fear is that if Greece defaults, cascading losses could threaten all of Europe.
Are American banks also vulnerable? No one is sure. They are not big lenders to Greece, but they are big players in the derivatives markets. If Greece defaulted, a European bank holding a credit-default swap on Greek debt from an American bank would be entitled to a payout from that bank.
Credit-default swaps are the kind of derivatives that were behind the blowup of the American International Group and the near meltdown that followed in the global financial system. From the available evidence, it doesn’t appear that a Greek default would have the same destructive power, but no one is eager to test the proposition.
In his recent confirmation hearing to be the next leader of the European Central Bank, Mario Draghi, the central banker of Italy, warned that no one really knows who is on the hook for these risky financial instruments. “Who are the owners of credit-default swaps? Who has insured others against a default of the country?” he asked.
Warning of a potential “chain of contagion,” he argued against requiring banks to restructure Greek debt — which could involve extending repayment terms or writing off principal — even though Greece’s apparent inability to pay in full makes a restructuring all but inevitable.
Whether or not American banks are at serious risk from this crisis, the fact is that nearly three years after A.I.G., derivatives are still largely unregulated. The financial reforms that are supposed to improve transparency and reduce speculation — trading derivatives on fully regulated exchanges, strict reporting requirements to regulators and new rules on capital adequacy and business conduct — have yet to be implemented.
The process has been slow in the face of heavy lobbying by the banks. Republican lawmakers are bent on derailing reform by any means necessary, including starving regulatory budgets, impeding the confirmation of regulatory nominees and pressing regulators to adopt light-touch rules. Some Democratic lawmakers and Obama officials are in favor of exemptions on specific derivatives rules that Wall Street opposes.
The uncertainty is greater when you consider that credit-default swaps are only one type of derivative that links banks worldwide. What dangers lurk in other derivatives, like those on currencies and foreign exchanges?
Greece is bound to get more bailouts as long as policy makers believe the alternative could be systemwide collapse. On Tuesday, the Greek Parliament gave the prime minister, George Papandreou, a vote of confidence [ http://www.nytimes.com/2011/06/22/world/europe/22greece.html ], clearing the way for another tough vote next week on wage cuts and other painful austerity measures that European officials are demanding in exchange for more aid [ http://www.nytimes.com/2011/06/22/business/global/22euro.html ].
The Greek debt crisis is another reminder of how little has really changed since the financial blowup — and how much more must be done to avert a repeat here and around the globe.
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/22/opinion/22wed1.html [comments at http://community.nytimes.com/comments/www.nytimes.com/2011/06/22/opinion/22wed1.html ]
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The Real Reboot Greece Needs
By LOUKAS TSOUKALIS
Published: June 21, 2011
Athens
GREECE’S prime minister, George A. Papandreou, comfortably survived a confidence vote on Tuesday, momentarily stabilizing his fragile Socialist government and clearing the way for a fresh infusion of financial assistance from the European Union.
But the country’s economic crisis, which began at the end of 2009 when the world belatedly realized that Greece’s fiscal and trade deficits were unsustainable, is far from over; in fact it has taken a new and dangerous turn.
The specter of a default on Greece’s sovereign debt — close to $500 billion, most of it owed to other Europeans — is haunting bankers and politicians. It could set off domino effects in the euro zone and beyond. Without urgent domestic reform and help from its European partners, Greece, a country of only 11 million people, risks being caught in an unbreakable cycle of decline.
The bailout by the European Union, with the participation of the International Monetary Fund, comes with strict conditions attached, conditions that the government has only partially met so far. The government has reduced the budget deficit to 10.5 percent of Greece’s gross domestic product from more than 15 percent — no small achievement — and passed a bold pension reform plan. But it has been much more hesitant about structural reform of the economy and privatization of state-controlled enterprises, because of organized opposition by vested interests, resistance from within the party and from trade unions, and the snail’s pace of Greek bureaucracy.
With unemployment at 16 percent, Greeks have been taking to the streets in protest against unpopular measures and a political system at risk of losing its legitimacy. Populists are having a field day, offering simplistic solutions and seeking scapegoats, preferably those beyond the nation’s borders. This is certainly not a phenomenon confined to Greece.
Mr. Papandreou has reshuffled his cabinet and tried to appease his party members, while putting out feelers to the main center-right opposition party over the creation of a national unity government — so far, unsuccessfully. He has been undoubtedly weakened in the process. Greece desperately needs a radical renewal of its political class; at stake is the survival of many members of that establishment. It also needs a peaceful revolution in its economy and society. But democracy takes time. The next parliamentary elections may not be very far off, but the political and economic climate has to improve first.
A few bold measures would send the message that the government is serious about scaling down the public sector. The solution is not more taxes to pay for poor quality services and over-staffed state organizations, the result of years of clientele politics in which the party in power appointed its friends to taxpayer-financed jobs. Greece needs more effective tax collection, together with the provision of a safety net for the rising numbers of the economically vulnerable.
But economic measures are surely not enough; in drama, as ancient Greeks knew, you need catharsis. In today’s Greece, this means that people who have mismanaged public funds should be brought to justice. Neither of the main political parties has been enthusiastic about this, because they fear the unpleasant surprises from opening such a Pandora’s box. The creation of a national unity government, with a specific program of limited duration, would help to restore public confidence and broaden support for politically difficult measures, notably the elimination of public sector jobs.
For the heavily indebted and uncompetitive economies of the European periphery, fiscal consolidation and structural reform — the mantras of I.M.F. economists — are a must. But what is the right dose of austerity? Too much could be economically counterproductive. Public tolerance of austerity may be reaching the breaking point.
Growth is the key: without it, any adjustment program is doomed to fail. In trying to cut bureaucratic tape, Greek politicians will need to create an environment that is propitious to investment, which has not been the case for many years. European funds for investment could bolster the determination of local politicians to proceed with structural reform. Some in Europe are already talking about a new Marshall Plan for financially embattled countries. Solidarity with strings attached is a politically intelligent form of investment.
The sovereign debt problem in several European countries, including Greece, raises the question of who should pay for the accumulated mistakes of the past — taxpayers or private creditors — and how much of the burden each country should bear. We need a political agreement on these questions, instead of piecemeal measures that leave politicians two steps behind the bond markets.
Greece is at a dangerous crossroads. Other countries — Portugal, Ireland, maybe Spain — are coming behind it. The consequences of excessive borrowing and consumption, of the bursting of the credit bubble, have caught up with us. If we fail to deal with them effectively, the achievements of decades of increasing integration and shared sovereignty in postwar Europe may no longer be taken for granted.
Loukas Tsoukalis is a professor of European integration at the University of Athens and the president of the Hellenic Foundation for European and Foreign Policy.
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/22/opinion/22tsoukalis.html
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http://investorshub.advfn.com/boards/read_msg.aspx?message_id=53285282 and preceding and following
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=64389324 and preceding and following
By RACHEL DONADIO and STEVEN ERLANGER
Published: June 22, 2011
ATHENS — They are the crown jewels of Greece’s socialist state, and they are now likely to go to the highest bidder: the ports of Piraeus and Thessaloniki; prime Mediterranean real estate; the national lottery; Greek Telecom; the postal bank and the national railway system.
And then comes the mandated deeper round of austerity measures, which will slash the wages of police officers, firefighters and other state workers who are protesting in Athens, and raise the taxes of citizens already inflamed by a recession-plagued economy and soaring joblessness.
After winning a pivotal confidence vote on his new cabinet on Tuesday, Prime Minister George Papandreou now has an even tougher task: to carry out a radical remedy of forced auctions and fiscal austerity for a sickened economy already in a deep slump.
The European Union, the European Central Bank and the International Monetary Fund, known as the “troika,” say that is the only way out for a heavily indebted Greece, while some economists say the program resembles medieval bloodletting — a dose of pain highly unlikely to revive the patient.
Mr. Papandreou’s first task is to persuade his governing Socialist Party to pass a bill that would save or raise about $40 billion by 2015, equivalent to 12 percent of Greece’s gross domestic product, through wage cuts and tax increases, at a time when the economy is shrinking.
To put that in perspective, spending cuts and tax increases of a similar scale in the United States would amount to $1.75 trillion, considerably more sweeping than even the most far-reaching proposals for reducing the American federal budget deficit. And Greece has promised to generate another $72 billion by selling off prime state assets, which many Greeks consider a fire sale of national patrimony.
While the commitment to austerity will allow Greece access to a fresh infusion of international aid, a growing chorus of economists say that the government’s new program will at best delay default and a restructuring of its debt, which is already more than 150 percent of the country’s gross domestic product. Steeper budget cuts and tax increases, they say, are the enemy of economic growth, which Greece desperately needs to make its debt burden lighter.
“You cannot keep on milking the cow without feeding it,” said Konstantinos Mihalos, the president of the Hellenic Chamber of Commerce in Athens.
In fact many economists fear Greece has already entered a “debt trap,” where paying the interest on its mound of debt requires more and more loans. “The Greeks have been told to accept more of the medicine that has already failed to treat the disease,” said Simon Tilford, chief economist at the Center for European Reform in London.
The Greeks have already reduced their deficit by five percentage points of the gross domestic product, “unprecedented cuts in a modern economy,” Mr. Tilford said. “But the cuts have had a much stronger negative impact on the economy than the troika imagined, and fiscal austerity has pushed the economy deep into recession. Debt can only be paid out of income, and that means growth.”
Greece does not have access to many tools to fight recession, like devaluing its currency or cutting interest rates, at least as long as it remains a member of the euro zone. Its monetary policy is controlled by the European Central Bank.
Some independent economists accept that Greece has no choice but to try a fresh round of cuts. Edwin M. Truman of the Peterson Institute for International Economics in Washington said Greece had to go through more pain because it had run a budget deficit even before making payments on its debt, meaning it needed loans to pay off its loans.
Only after Greece reorganizes its budget, tax collection and labor market and is running a surplus — not including interest payments on the debt — can economists begin to calculate how much in debt payments Greece is actually able to afford, and then figure out how big a debt restructuring it needs.
“As long as they’re running a primary deficit, they need to keep tightening the belt,” Mr. Truman said. “Rescheduling now doesn’t relieve Greece of the burden of fixing the economy to create a surplus.”
It is not getting any easier. In the year since its first bailout, Greece has cut $17 billion through across-the-board wage cuts, layoffs and attrition in its bloated state sector, which employs 800,000 people, a quarter of the Greek work force. But given its recession, the economy shrank and tax revenues fell, meaning that Greece did not meet the original target of a government deficit of 9.1 percent of G.D.P. as agreed with its foreign lenders, prompting them to demand more cuts.
European demands have placed Mr. Papandreou in an increasingly untenable position. He must sell the increasingly restive Greek people on more austerity with no clear signs of recovery. And he has to persuade his Socialist Party on reforms that undo almost everything the party has stood for in the past.
At least one Socialist member of Parliament, Alexandros Athanasiadis, has already announced that he will not vote for the new austerity measures, citing his opposition to selling part of the state’s stake in the electricity utility whose power plants dominate his district in northeastern Greece.
On Wednesday, members of the public power company union, Genop, occupied the Transport Ministry and orchestrated some power failures to protest the sale, which seeks to reduce the state’s stake to 34 percent from 51 percent in the profitable company.
To many Greeks, selling that and many other state-owned companies and assets, even those that currently lose money, is tantamount to a loss of sovereignty — especially if wealthy investors from Germany and the other big European powers pushing austerity of Greece end up purchasing the assets for a hefty discount.
“We’ve always been advocates of privatization because the national state cannot play the role of the entrepreneur and has in fact proven to be a complete disaster every time they attempt to do so,” said Mr. Mihalos of the Athens Chamber of Commerce.
“But at these extremely low levels, especially for those companies quoted on the stock exchange, we have to be very wary,” he added. “If we go by today’s values, as a result of the recession and the crisis the country finds itself in, it will be really selling the crown jewels at a pittance of their cost.”
Mr. Papandreou’s government has not managed to make a convincing case for the sell-off to many Greeks, where the idea of a fire sale has taken hold, setting off a wave of national indignation. “Imagine if you asked me for my apartment, and I gave you the whole building,” said Dorothea Ekonomopoulou, a public school teacher in Athens, as she stood among demonstrators in Syntagma Square this week.
Rachel Donadio reported from Athens, and Steven Erlanger from Paris.
*
Related
Greek Parliament Passes Critical Confidence Vote (June 22, 2011)
http://www.nytimes.com/2011/06/22/world/europe/22greece.html
Derivatives Cloud the Possible Fallout From a Greek Default (June 23, 2011)
http://www.nytimes.com/2011/06/23/business/global/23swaps.html [next below]
Tapped by a Rival, Greece’s New Finance Minister Faces Daunting Task (June 23, 2011)
http://www.nytimes.com/2011/06/23/business/global/23euro.html
Major Banks and Insurers Are Asked to Assist in a 2nd Greek Rescue Package (June 23, 2011)
http://www.nytimes.com/2011/06/23/business/global/23banks.html
Interactive Maps: Debt Rising in Europe
Greece is not the only country in Europe with problems with credit and debt. (June 16, 2011)
http://www.nytimes.com/interactive/2010/04/06/business/global/european-debt-map.html
*
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/23/world/europe/23greece.html [ http://www.nytimes.com/2011/06/23/world/europe/23greece.html?pagewanted=all ]
===
Derivatives Cloud the Possible Fallout From a Greek Default
"There is lack of transparency and visibility in these products, and that increases the risk," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, a boutique banking firm in New York.
Jin Lee/Bloomberg News
By LOUISE STORY
Published: June 22, 2011
It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.?
No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate.
In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders.
The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis. The American insurer needed a $182 billion federal bailout [ http://www.nytimes.com/2010/06/30/business/30aig.html ] during the financial crisis because it had insured the performance of mortgage bonds through derivatives and could not pay on all of them.
Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among nonbank entities like insurance companies and hedge funds.
Asked about derivatives tied to Europe at a Wednesday press conference, Ben S. Bernanke, the chairman of the Federal Reserve, said that the direct exposure is small but that “a disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices and so on. And so in that respect I think the effects in the United States would be quite significant.”
Derivatives traders and analysts are debating just how much money is involved in these contracts and what sort of threat they pose to markets in Europe and the United States. On the one hand, just over $5 billion is tied up in credit-default swap contracts that will pay out if Greece defaults, according to Markit [ http://www.markit.com/en/ ], a financial data firm based in London. That is less than 1 percent the size of Greece’s economy, but that is a conservative calculation that counts protections banks have in place offsetting their positions, and is called the net exposure.
The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements [ http://www.bis.org/publ/qtrpdf/r_qa1106.pdf ]. The gross exposure of the five most financially pressed European Union countries — Portugal, Italy, Ireland, Greece and Spain — is about $616 billion. And the broader figure on all derivatives from those countries is unknown.
The pervasiveness of these opaque contracts has complicated negotiations for European officials, and it underscores calls for more transparency in the derivatives market.
The uncertainty, financial analysts say, has led European officials to push for a “voluntary” Greek bond financing solution that may sidestep a default, rather than the forced deals of other eras. “There’s not any clarity here because people don’t know,” said Christopher Whalen, editor of The Institutional Risk Analyst [ http://us1.institutionalriskanalytics.com/pub/IRAMain.asp ]. “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”
Regulators are aware of this problem. Financial reform packages on both sides of the Atlantic mandated many changes to the derivatives market, and regulators around the globe are drafting new rules for these contracts that are meant to add transparency as well as security. But they are far from finished and could take years to put into effect.
Darrell Duffie [ http://www.darrellduffie.com/ ], a professor who has studied derivatives at the Graduate School of Business at Stanford University, said that he was concerned that regulators may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default.
Regulators, he said, “have access to everything they need to have. Whether they’ve collected all the information and analyzed it is different question. I worry because many of those leaders have said there’s no way we’re going to let Greece default. Does that mean they haven’t had conversations about what happens if Greece defaults? Is their commitment so severe that they haven’t had real discussions about it in the backrooms?”
Regulators aren’t saying much. When asked what data the Federal Reserve had collected on American financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by Mr. Bernanke [ http://www.federalreserve.gov/newsevents/speech/bernanke20110505a.htm ] in May in which he did not mention derivatives tied to Greece. At the Wednesday press conference, Mr. Bernanke said that commonly cited data on derivatives do not take into account the offsetting positions banks have on their Greek exposures. And with those positions, he said, even if there is a Greek default, “the effects are very small.”
At the European Central Bank, Eszter Miltenyi, a spokeswoman, said: “This is much too sensitive I think for us to have a conversation on this.”
On Wall Street, traders are debating whether the industry’s process for unwinding credit-default swaps would run smoothly if Greece defaulted. The process is tightly controlled by a small group of bankers [ http://www.nytimes.com/2010/12/12/business/12advantage.html ] who meet in an industry group called the International Swaps and Derivatives Association [ http://www2.isda.org/ ].
The process is fairly well developed, but it has been little tested on the debt of countries. For the most part, Wall Street has cashed in on credit-default swaps tied to corporations’ debt.
For most purposes, determining whether a default occurred in a country’s debt falls to ratings agencies like Fitch and Moody’s. But for the derivatives market, a committee of I.S.D.A. makes the call.
If the committee decides there was a default, it passes the baton to Markit, which is partly owned by the banks. Markit holds an auction to determine how much value has been lost on the debt, and that determines how much money is paid out to the parties that purchased the insurance.
Marc Barrachin, who runs the auctions, said there was no reason to worry about the process.
“The process is very smooth, very well understood by market participants,” said Mr. Barrachin, the director of credit products at Markit. “I mean if you go back to 2008 right in the fall, in five days we had auctions for Fannie Mae, Freddie Mac and Lehman Brothers, and two weeks after that you had Washington Mutual. I go back to that period of stress and the orderly settlements of large amounts of credit derivatives, for names that were widely followed, were testament of the efficiency of the auction system.”
In the case of A.I.G., there was not an unwind process run by I.S.D.A. because A.I.G.’s contracts were tied to mortgage bonds. Those sorts of derivatives pay out money over time, whereas derivatives tied to a country’s debt pay out on one occasion: if a default occurs. That makes sovereign derivatives more similar to derivatives on corporate bonds and different in some ways from the situation at A.I.G.
But the smoothness of the process would be irrelevant if the risk were concentrated in just a few weak institutions.
The uncertainty around how a sovereign default would course through the derivatives market had greatly increased the price premiums banks were charging to put on new derivatives trades related to European countries. As of last week, the price to insure against default on $10 million of Greek debt was $1.9 million per year, up from $775,000 a year ago, according to Markit.
“There is lack of transparency and visibility in these products, and that increases the risk,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman [ http://www.bbh.com/index.shtml ], a boutique banking firm in New York.
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/23/business/global/23swaps.html [ http://www.nytimes.com/2011/06/23/business/global/23swaps.html?pagewanted=all ] [comments at http://community.nytimes.com/comments/www.nytimes.com/2011/06/23/business/global/23swaps.html ]
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Greece and You
Editorial
Published: June 21, 2011
The euro-zone bailout of Greece is, in good part, a bailout of European banks. In France and Germany alone, banks hold some $90 billion worth of public and private Greek debt. The European Central Bank also holds Greek government debt, and the fear is that if Greece defaults, cascading losses could threaten all of Europe.
Are American banks also vulnerable? No one is sure. They are not big lenders to Greece, but they are big players in the derivatives markets. If Greece defaulted, a European bank holding a credit-default swap on Greek debt from an American bank would be entitled to a payout from that bank.
Credit-default swaps are the kind of derivatives that were behind the blowup of the American International Group and the near meltdown that followed in the global financial system. From the available evidence, it doesn’t appear that a Greek default would have the same destructive power, but no one is eager to test the proposition.
In his recent confirmation hearing to be the next leader of the European Central Bank, Mario Draghi, the central banker of Italy, warned that no one really knows who is on the hook for these risky financial instruments. “Who are the owners of credit-default swaps? Who has insured others against a default of the country?” he asked.
Warning of a potential “chain of contagion,” he argued against requiring banks to restructure Greek debt — which could involve extending repayment terms or writing off principal — even though Greece’s apparent inability to pay in full makes a restructuring all but inevitable.
Whether or not American banks are at serious risk from this crisis, the fact is that nearly three years after A.I.G., derivatives are still largely unregulated. The financial reforms that are supposed to improve transparency and reduce speculation — trading derivatives on fully regulated exchanges, strict reporting requirements to regulators and new rules on capital adequacy and business conduct — have yet to be implemented.
The process has been slow in the face of heavy lobbying by the banks. Republican lawmakers are bent on derailing reform by any means necessary, including starving regulatory budgets, impeding the confirmation of regulatory nominees and pressing regulators to adopt light-touch rules. Some Democratic lawmakers and Obama officials are in favor of exemptions on specific derivatives rules that Wall Street opposes.
The uncertainty is greater when you consider that credit-default swaps are only one type of derivative that links banks worldwide. What dangers lurk in other derivatives, like those on currencies and foreign exchanges?
Greece is bound to get more bailouts as long as policy makers believe the alternative could be systemwide collapse. On Tuesday, the Greek Parliament gave the prime minister, George Papandreou, a vote of confidence [ http://www.nytimes.com/2011/06/22/world/europe/22greece.html ], clearing the way for another tough vote next week on wage cuts and other painful austerity measures that European officials are demanding in exchange for more aid [ http://www.nytimes.com/2011/06/22/business/global/22euro.html ].
The Greek debt crisis is another reminder of how little has really changed since the financial blowup — and how much more must be done to avert a repeat here and around the globe.
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/22/opinion/22wed1.html [comments at http://community.nytimes.com/comments/www.nytimes.com/2011/06/22/opinion/22wed1.html ]
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The Real Reboot Greece Needs
By LOUKAS TSOUKALIS
Published: June 21, 2011
Athens
GREECE’S prime minister, George A. Papandreou, comfortably survived a confidence vote on Tuesday, momentarily stabilizing his fragile Socialist government and clearing the way for a fresh infusion of financial assistance from the European Union.
But the country’s economic crisis, which began at the end of 2009 when the world belatedly realized that Greece’s fiscal and trade deficits were unsustainable, is far from over; in fact it has taken a new and dangerous turn.
The specter of a default on Greece’s sovereign debt — close to $500 billion, most of it owed to other Europeans — is haunting bankers and politicians. It could set off domino effects in the euro zone and beyond. Without urgent domestic reform and help from its European partners, Greece, a country of only 11 million people, risks being caught in an unbreakable cycle of decline.
The bailout by the European Union, with the participation of the International Monetary Fund, comes with strict conditions attached, conditions that the government has only partially met so far. The government has reduced the budget deficit to 10.5 percent of Greece’s gross domestic product from more than 15 percent — no small achievement — and passed a bold pension reform plan. But it has been much more hesitant about structural reform of the economy and privatization of state-controlled enterprises, because of organized opposition by vested interests, resistance from within the party and from trade unions, and the snail’s pace of Greek bureaucracy.
With unemployment at 16 percent, Greeks have been taking to the streets in protest against unpopular measures and a political system at risk of losing its legitimacy. Populists are having a field day, offering simplistic solutions and seeking scapegoats, preferably those beyond the nation’s borders. This is certainly not a phenomenon confined to Greece.
Mr. Papandreou has reshuffled his cabinet and tried to appease his party members, while putting out feelers to the main center-right opposition party over the creation of a national unity government — so far, unsuccessfully. He has been undoubtedly weakened in the process. Greece desperately needs a radical renewal of its political class; at stake is the survival of many members of that establishment. It also needs a peaceful revolution in its economy and society. But democracy takes time. The next parliamentary elections may not be very far off, but the political and economic climate has to improve first.
A few bold measures would send the message that the government is serious about scaling down the public sector. The solution is not more taxes to pay for poor quality services and over-staffed state organizations, the result of years of clientele politics in which the party in power appointed its friends to taxpayer-financed jobs. Greece needs more effective tax collection, together with the provision of a safety net for the rising numbers of the economically vulnerable.
But economic measures are surely not enough; in drama, as ancient Greeks knew, you need catharsis. In today’s Greece, this means that people who have mismanaged public funds should be brought to justice. Neither of the main political parties has been enthusiastic about this, because they fear the unpleasant surprises from opening such a Pandora’s box. The creation of a national unity government, with a specific program of limited duration, would help to restore public confidence and broaden support for politically difficult measures, notably the elimination of public sector jobs.
For the heavily indebted and uncompetitive economies of the European periphery, fiscal consolidation and structural reform — the mantras of I.M.F. economists — are a must. But what is the right dose of austerity? Too much could be economically counterproductive. Public tolerance of austerity may be reaching the breaking point.
Growth is the key: without it, any adjustment program is doomed to fail. In trying to cut bureaucratic tape, Greek politicians will need to create an environment that is propitious to investment, which has not been the case for many years. European funds for investment could bolster the determination of local politicians to proceed with structural reform. Some in Europe are already talking about a new Marshall Plan for financially embattled countries. Solidarity with strings attached is a politically intelligent form of investment.
The sovereign debt problem in several European countries, including Greece, raises the question of who should pay for the accumulated mistakes of the past — taxpayers or private creditors — and how much of the burden each country should bear. We need a political agreement on these questions, instead of piecemeal measures that leave politicians two steps behind the bond markets.
Greece is at a dangerous crossroads. Other countries — Portugal, Ireland, maybe Spain — are coming behind it. The consequences of excessive borrowing and consumption, of the bursting of the credit bubble, have caught up with us. If we fail to deal with them effectively, the achievements of decades of increasing integration and shared sovereignty in postwar Europe may no longer be taken for granted.
Loukas Tsoukalis is a professor of European integration at the University of Athens and the president of the Hellenic Foundation for European and Foreign Policy.
© 2011 The New York Times Company
http://www.nytimes.com/2011/06/22/opinion/22tsoukalis.html
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