Greek debt-swap deal nears; Germany plans budget oversight

The long-awaited agreement on a debt swap between Greece and its private creditors may come into fruition shortly according to representatives dealing with the negotiations. Despite some minor loose ends still to be put together, parties have been closing in differences for a debt swap that would chop 100 bln EUR off Greece’s debt burden.

According to AP: “Private investors would receive new bonds whose face value is half of the existing bonds, a longer maturity and pay an average interest rate of slightly less than 4%. The final deal will be announced next week in tandem with a new 130 bln EUR loan program for Greece being put together by the “Troika” that is hoped to cover Greece’s borrowing needs through 2015. The interest rate or coupon on the new bonds was a major stumbling block in the negotiations with private creditors – who were until Saturday insisting it should be above 4.0%.”

While the deal is likely to be finalized soon, odds are it will not occur before the EU Summit that takes place this Monday, in which the prospects that Greece may need more than 130 bln EUR in aid for its new loan program will also dominate part of the discussions. The main issue now appears to be that in order for the EU/IMF to deliver the second aid package though, reports are starting to emerge that German will demand on Greece to surrender sovereignty over its budget process. Greek government officials said they will never agree to that idea.

Pressure mounts for Greece to give up budget control

Germany has finally run out of patience amid the realization that Greece lacks sufficient discipline to adhere and implement by themselves the Euro rescue measures requested in order to reform its soaring budget deficit. According to German Economy Minister Philipp Roesler, the time has come for Greece to surrender control of its budget policy to outside institutions if it cannot implement reforms attached to euro zone rescue.

As read in Reuters, “Greece must surrender control of its budget policy to outside institutions if it cannot implement reforms attached to euro zone rescue measures, the German economy minister was quoted as saying on Sunday. Philipp Roesler became the first German cabinet member to openly endorse a proposal for Greece to surrender budget control after Reuters quoted a European source on Friday as saying Berlin wants Athens to give up budget control.”

Fitch downgrades five euro zone nations

On Friday, Fitch Ratings cut the credit ratings of five euro zone nations Belgium, Cyprus, Italy, Slovenia and Spain, while affirming Ireland’s credit rating as it concluded the review of the six euro zone sovereigns it placed on Rating Watch Negative (RWN) on 16 December 2011.

Fitch downgraded Italy to A minus from A+, while Spain was cut to A from AA-, both nations by 2 notches. Belgium was cut to AA from AA+, Cyprus was downgraded to BBB- from BBB and Slovenia was cut to A from AA-. Ireland’s BBB+ rating was affirmed.

Even though the six countries have been removed from RWN, they hold negative outlook, indicating a slightly greater than 50% chance of a downgrade over a two-year time horizon, said Fitch. The rating agency also maintains negative outlook on the ‘AAA’-rated France and ‘BB+’-rated Portugal.

In its statement, Fitch said these countries have near-term vulnerability to monetary and financial shocks. “Consequently, these sovereigns do not, in Fitch’s view, accrue the full benefits of the euro’s reserve currency status”.

“In Fitch’s opinion, the euro-zone crisis will only be resolved as and when there is broad economic recovery. It is evident that further substantial reforms of the governance of the euro zone will be required to secure economic and financial stability, including greater fiscal integration”, the ratings agency said.


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