Greece’s Escape Clause Cues
A month after completing a signature bond swap which imposed a record loss while retroactively altering contracts and subordinating private creditors in a perilous Euro-zone precedent, the Greek central bank warned that future membership was in doubt as this year’s GDP drop was put at 5 percent, as the European Investment Bank began inserting drachma conversion clauses into infrastructure project documents. Local banks took a EUR 25 billion haircut and will need at least twice that amount in recapitalization under the second EU-IMF program, as Cypriot lender without that backstop scrambled to absorb similar damage. Around EUR 5 billion in foreign law instruments were not exchanged and holdouts may try to press their case in light of a New York decision in the lengthy Argentina fight ordering pari-passu payment of claims. The US government has filed a brief against the interpretation and officials in Athens stress they lack funds to cover the whole amount. A large redemption comes due a week after elections in which neither of the two main parties will be able to command popular support according to opinion readings which show strong extremist inroads. Further budget cuts must be found by June for next year following the latest Troika review, with provisional data indicating a 9 percent of GDP deficit. The current account gap will fall slightly from that level in 2011, while bank deposits off EUR 70 billion since the crisis onset continue to flee the system. In Portugal, which has also slipped back into the emerging market class after removal from world bond indices, the external balance has likewise improved and several privatizations have occurred. Corporate and household debt burdens far outstrip the public one at 115 percent of output, and 15 percent unemployment will be aggravated by labor reform opposed by powerful unions. The next big commercial bond amortization is in September 2013 when access is to be regained, but investors remain dubious of that outcome as well as the state’s honoring of numerous company borrowing guarantees.
In traditional emerging Europe, Hungary was placed at the top of the IMF’s list for bank and sovereign spillover as corridor negotiations over a new facility unfolded over its spring gathering. The EU has reopened the way for assistance after clarification of central bank law changes and submission of a revised fiscal adjustment blueprint which envisions near zero economic growth this year. The benchmark interest rate was kept at 7 percent despite the forint again touching 300 and medium term bond yields almost 9 percent, as negative retail sales choked consumption. To meet the 3 percent of GDP convergence target a new financial transaction tax will succeed the special one applied by Prime Minister Orban whose opinion polls now single out reckless decisions.
