greek debt

Josef Ackermann, the CEO of Deutsche Bank (DB), has given the all-clear signal many times in the past. He has repeatedly said that the worst was over, only to see the financial crisis strengthen its grip on the world economy.

Last week, however, Ackermann was singing a completely different tune. Although many indicators are once again pointing skyward, he said at a Berlin summit on the economy, Chancellor Angela Merkel, the assembled cabinet ministers, corporate CEOs and union leaders should not to be deluded. He warned emphatically that the financial situation could deteriorate once again. "A few time bombs" are still ticking, Ackermann told his audience, noting that the growing problems of highly leveraged small countries could lead to new tremors. And then, almost casually, Ackermann mentioned the problem child of the European financial world by name: Greece.

Ackermann isn't alone in his opinion. Practically unnoticed by the public, an issue has returned to the forefront in recent weeks—one that was a cause for great concern at the height of the financial crisis but then, as optimism about the economy began to grow, was eventually forgotten: the fear of a national bankruptcy in the euro zone. And the question as to whether such a bankruptcy, should it come about, could destroy the common European currency.

Greece was always at the very top of the list of countries at risk. But now the danger appears to be more acute than ever.

Insuring Against Default

The seismographs in the trading rooms at investment banks detected the initial tremors weeks ago. Today, when the code "Greece CDS 10Yr" appears on Bloomberg terminals, a curve at the bottom of the screen points sharply upward. It reflects the price that banks are now charging to insure 10-year Greek government bonds against default.

The price of these securities has jumped dramatically since Greek Finance Minister Giorgos Papakonstantinou announced three weeks ago that his country's budget deficit would reach 12.7 percent of gross domestic product this year, instead of the 6 percent originally forecast—and well about the 3 percent limit foreseen by European Union rules.

A second curve is the mirror image of the first. It depicts the price of government bonds from the euro-zone country. It points sharply downward.



Greece already pays almost 2 percent more in interest on its debt than Germany. In other words, at a total debt of €270 billion ($402 billion), Greece will be paying €5 billion more in annual interest than it would if it were Germany. And, with rating agencies threatening to downgrade the country's already dismal credit rating, the situation is only likely to get worse.

The finance ministers and central bankers of the euro-zone member states are as alarmed as they are helpless. "The Greek problem," says a senior administration official in Berlin, "will be an acid test for the currency union."

No Buyers Can Be Found

Greece has already accumulated a mountain of debt that will be difficult if not impossible to pay off. The government has borrowed more than 110 percent of the country's economic output over the years, and if investors lose confidence in the bonds, a meltdown could happen as early as next year.

That's when the government borrowers in Athens will be required to refinance €25 billion worth of debt—that is, repay what they owe using funds borrowed from the financial markets. But if no buyers can be found for its securities, Greece will have no choice but to declare insolvency—just as Mexico, Ecuador, Russia and Argentina have done in past decades.


This puts Brussels in a predicament. European Union rules preclude the 27-member bloc from lending money to member states to plug holes in their budgets or bridge deficits.

And even if there were a way to circumvent this prohibition, the consequences could be disastrous. The lack of concern over budget discipline in countries like Spain, Italy and Ireland would spread like wildfire across the entire continent.




Financial leaders, with a nervous eye on Greece, pledged on Saturday to address the risks posed to the global recovery from high government debt.

But they also stressed that high unemployment in many countries remained a threat to a sustainable recovery from the deepest global downturn since the end of World War II.

The Greek debt crisis has dominated the weekend discussions among finance officials from the world's major economies.

Meeting in Washington, the policy-setting panel of the 186-nation International Monetary Fund on Saturday cited signs that the recovery from the global downturn is gaining strength, but also noted difficult challenges lie ahead in such areas as growing government debt burdens and lingering high unemployment.

"The worst seems to be behind us, but we are not out of the woods yet," Egyptian Finance Minister Youssef Boutros-Ghali, the chairman of the IMF panel, told reporters.

Greece's finance minister, George Papaconstantinou, flew to Washington for two days of talks with top officials of the IMF, the European Union and the Obama administration.

Treasury Secretary Timothy Geithner urged the Greek government, European officials and the IMF to "move quickly to put in place a package of strong reforms and substantial concrete financial support," according to a Treasury statement.

Geithner participated in a meeting at IMF headquarters Saturday morning which included Papaconstantinou, IMF Managing Director Domininque Strauss-Kahn and Olli Rehn, the European Commission's top economic official.

Greece is hoping to obtain loans of about $40 billion from the group of 16 European countries which, like Greece, use the euro as a common currency, and an additional $13.4 billion from the IMF. Crippled by soaring borrowing costs, Greece on Friday made a formal request for the aid. Prime Minister George Papandreou declared in a televised address that his country's economy was a "sinking ship."

European and IMF officials, however, have made clear that their support will carry a high price: putting Greece's fiscal house in order. Greece has already agreed to put in place an austerity program that cuts civil servants' pay, freezes pensions and raises taxes. But the country faces years of painful cutbacks and doubts about its long-term finances.

The austerity program has generated massive street protests in Greece and labor strikes.

Asked at the news conference whether he was concerned that the IMF was being "demonized," Strauss-Kahn said it would not be the first time that the IMF, which often delivers harsh economic remedies, has been cast as the villain.

But he said that today's IMF is a changed institution from the agency that generated anger for its austerity programs in previous crises around the world. IMF officials have said its current remedies are crafted with an eye to protecting the most vulnerable. The IMF is also striving to be more representative of the views of developing countries, not just rich nations that contribute the largest shares of support.

"The Greek citizens shouldn't fear the IMF. We are there to try to help them," said Strauss-Kahn, a former Socialist finance minister of France who has been mentioned as a possible French presidential candidate in 2012.

Strauss-Kahn dodged all questions about the specifics of the IMF program including when negotiations with the Greek government might be completed and the package submitted to the IMF board for approval. The IMF on Friday did pledge to move expeditiously and the expectation is that Greece will have the first portion of its loan in time to meet a large debt payment coming due on May 19.

The IMF policy discussions Saturday followed a daylong meeting of the Group of 20 major economies on Friday which includes the traditional Group of Seven economic powers -- the United States, Japan, Germany, Britain, France, Italy and Canada -- and emerging developing countries including China, Brazil, India and South Korea.

Most of the countries on the G-20 also have seats on the IMF's policy board. The weekend talks will wrap up Sunday with discussions of a steering committee for the World Bank, the IMF's sister lending organization and the world's biggest provider of development loans.

The discussions this weekend were designed to prepare the agenda for a meeting G-20 leaders including President Barack Obama which will take place in Canada in June. Among the changes triggered by the deep global recession, the G-20 has taken over as the key agenda-setting group for the global economy, a role before played by the G-7.

The G-20 leaders, at their last meeting in Pittsburgh in September, directed the finance officials to work to develop coordinated plans to reform financial regulations in an effort to prevent the financial meltdown that contributed to the deep recession, the worst globally since World War II.

However, both the G-20 discussions and talks Saturday underscored wide differences on the issue of financial regulations. Geithner noted that the United States is pushing ahead with financial reforms with the Senate scheduled to take up its version of the overhaul this coming week.

The finance officials were unable to agree on an IMF staff recommendation for the creation of two types of new taxes on banks to make sure that taxpayers are not saddled with the costs of resolving future financial crises.

Strauss-Kahn sought to play down the differences, saying the G-20 should still be able to meet a series of upcoming deadlines from presenting recommendations to the G-20 leaders in June to developing new global capital standards by the end of this year.

"Some countries want to implement taxation. Some don't. But everybody agrees, it has to be done in a coordinated way," Strauss-Kahn said. He said the key principle was to make sure that any changes did not foster a race to the bottom in which global banks would move to countries with the weakest regulations.

Obama in January proposed a $90 billion tax on big banks to pay for losses from the financial bailout and both the House and Senate bills pending before Congress propose taxes to create funds that would pay the costs of future crises.



Yields on Greek bonds pushed to fresh highs on Monday and shares in Athens sank as investors continued to worry about the country’s near-term ability to finance its debt. Some raised the specter of default even if international aid arrived soon.
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Protesters carried a banner reading “I.M.F. Go Home” past the Greek Parliament on Monday.

Analysts said traders shifted out of Greek bonds amid worries about the country’s ability to raise more than 11 billion euros, or $14.8 billion, in May, especially in light of the delay of a crucial meeting that was to be held Monday between European, Greek and International Monetary Fund officials.

Vassilis Papadimitriou, a spokesman for the Greek government, said the meeting, postponed because of travel chaos in Europe, would go ahead Wednesday provided that European Union and central bank officials were able to get to Athens. Airports across Europe remained closed Monday because of the volcanic eruption on Wednesday in Iceland, which has spread potentially hazardous ash across the Continent.

Bill Murray, a Washington-based spokesman for the I.M.F., confirmed on Monday that most members of the I.M.F. team had arrived in Athens to discuss “policies that could be the basis for a fund financing program.” He declined to comment on the duration of the mission.

Even with those talks expected to move ahead, investors were worrying about the country’s financing needs — in coming months and years.

“The market wants it clearly pinned down that the money is there and ready to go,” said David Schnautz, a strategist at Commerzbank in Frankfurt. The Greek government’s financial position “looks safe for April, but there is uncertainty about May,” he said.

But it is not clear what debt maturities the agency will use to raise those funds, Mr. Schnautz said, adding that in recent weeks there had been “an erosion of the investor base” in Greek bonds.

Another factor that appears to have scared potential buyers was a recent suggestion by Greece that it might issue dollar-denominated bonds — something that some investors associate more with emerging-markets issuers than established euro zone borrowers.

In addition, there is still a risk of a veto on the package of up to 30 billion euros in aid promised this month by lawmakers from some euro zone countries.

The Greek government plans to auction 1.5 billion euros of three-month Treasury bills Tuesday, providing some idea of the level of return that investors expect for holding short-term Greek debt.

Further ahead, some analysts are starting to foresee default as likely even with the bailout, asserting that Greece does not have the economic flexibility to emerge from the downturn.

“An eventual default by Greece seems probable, and rescue packages by the I.M.F. and the E.U. may only buy time but not alter the ultimate outcome,” Stephen Jen, managing director of macroeconomics at BlueGold Capital in London, said in a recent research note.

He drew parallels with the case of Argentina, which defaulted in 2001. Both examples involved “weak fiscal management, an uncompetitive industrial structure, cutting spending in a weak economy, open capital accounts and an inappropriate currency peg prior to the crisis,” Mr. Jen said.

He added Greece’s fiscal standing was “actually substantially weaker than Argentina’s” on the eve of that country’s default in 2001.

The yield on benchmark 10-year Greek government bonds closed in Europe at 7.63 percent — the highest since Greece joined the euro. That widened the spread, or difference, with equivalent German bonds to 4.55 percentage points.

The Athens composite share index closed down 2.8 percent, pushing it down almost 12 percent for the year to date.

Investors also showed jitters Monday about Portugal’s ability to finance its debt load. Portuguese 10-year government bonds yields also climbed, to 4.56 percent, a gain of 12 basis points and their highest level since March 2009.

Though facing less severe constraints than Athens, many investors say they think that Lisbon could be the next in the euro zone to seek international aid, given its weak economic fundamentals and high budget deficit.

Separately, the European Central Bank, in a report Monday on the lessons learned from the financial crisis, recommended strengthening the supervision of over-the-counter derivative markets.

“The soundness, resilience and transparency of O.T.C. derivatives markets should be enhanced,” the report said, stressing the need for progress toward establishing central counterparties to smooth the process of clearing.

The European Commission issued a paper on planned action to improve the resilience of these derivatives markets in October and legislative proposals are expected soon.

The central bank also warned investors against excessive reliance on ratings agencies, which the bank characterized as having been guilty of “changing the rating of a critical counterparty’s creditworthiness too late.”


Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.

Greeks aren't very welcome in the Rue Alphones Weicker in Luxembourg. It's home to Eurostat, the European Union's statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data "cannot be confirmed" or has been requested but "not received."

Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn't exceed 60 percent.


The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. "Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

Fictional Exchange Rates

Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today's records, it stands at 5.2 percent.


At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

The bank declined to comment on the controversial deal. The Greek Finance Ministry did not respond to a written request for comment.