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Posts Tagged ‘Eurozone’

Why Portugal May Be the Next Greece

Posted by Admin on May 22, 2012

http://business.time.com/2012/03/27/why-portugal-may-be-the-next-greece/

Why Portugal May Be the Next Greece

The worst is over for the euro zone, the experts say. But Greece isn’t really fixed and Portugal could become a second big problem before year-end

By Michael Sivy | @MFSivy | March 27, 2012

When Greece celebrated its Independence Day on Sunday, there were scattered protests over the harsh austerity program aimed at stabilizing the country’s finances. The government reportedly removed low-hanging fruit from bitter-orange trees along the parade route, so it couldn’t be thrown by protesters. But, basically, the most recent bailout appears to be successful. As a result, worries about the European financial crisis have diminished somewhat. Indeed, European Central Bank president Mario Draghi has said that the worst is over for the euro-currency zone.

Such optimism may be premature, however. Not only does Greece remain a long-term financial concern, but in addition Portugal is on track to become a second big problem.

The dangers Greece still poses are clear. Higher taxes and government-spending cuts may reduce new borrowing, but such austerity policies also undermine a country’s ability to pay the interest on its existing debt. Unless accompanied by progrowth policies, austerity can become the financial equivalent of a medieval doctor trying to cure patients by bleeding them. In addition, the bailout plan for Greece consisted of marking down the value of much of the country’s debt held by banks and other private lenders. That means entities such as the European Central Bank now hold most of Greece’s remaining debt. And so, in the event of a default, important international institutions would suffer the greatest damage.

(MORE: Is Germany’s Euro-Crisis Strategy Actually Working?)

The net result has been to postpone the Greek financial crisis for months or even a couple of years, while raising the stakes if things go wrong. That could be seen as a considerable achievement, if you believe Greece is a unique case and that the problem has been successfully contained. The trouble is that other countries — and especially Portugal — seem to be heading down the same path. Here’s why forecasters are worried:

Portuguese interest rates haven’t come down. Because of the Greek crisis, bond yields rose to dangerous levels in several financially troubled European countries. Then after Greece was bailed out, yields fell in most of them. In Italy, yields on bonds with maturities of around 10 years dropped from more than 7.2% to around 5%; in Spain, from 6.7% to 5.4%; and in Ireland, from 9.7% to 6.9%. The notable exception was Portugal, where bond yields came down a bit but still remain above 12%. Double-digit borrowing costs are impossible for a heavily indebted country to sustain for any significant period of time. Yet Portugal’s bond yields have been above 10% for the past nine months.

Portugal’s total debt is greater than that of Greece. In one way, Greece really is unique — the country’s massive debt is largely the result of borrowing by the government rather than by the private sector (corporations and households). By contrast, Portugal, Spain and Ireland have far more private-sector debt. As a result, while government debt in Portugal is less than that of Greece, relative to GDP, total debt (including private-sector debt) is actually greater.

(MORE: The Most Important Man in Europe)

The Portuguese economy is shrinking. Portugal’s economy has been weak ever since the financial crisis began in 2008, and the country has actually been in recession for more than a year. Moreover, last month the Portuguese government projected that the country’s economy would contract by 3.3% in 2012. As Portuguese companies struggle to pay off their own massive debt, it’s hard to imagine that they will be able to help pull the country out of recession.

Thanks to a bailout last year, Portugal has enough money to make it into 2013, despite brutally high interest rates and a shrinking economy. But the markets are unlikely to wait that long to go on red alert. In the case of Greece, bond yields topped 13% in April 2011, and by September they were above 20% and heading for 35%. Portuguese yields have been above 11.9% for the past four months and have topped 13% several times. If the country follows the same timeline as Greece, Portugal could suffer a serious financial crisis before the end of the year.

There are a number of reasons such an outcome would be serious, despite the relatively small size of Portugal’s economy. First, the European Union has been operating on the assumption that Greece is a unique case, a poor country suffering from rampant tax fraud and an unusually dysfunctional government bureaucracy. If another euro-zone country experiences similar problems — and they occur partly because of private-sector debt rather than government borrowing — then the flaws in the system start looking more general, and the stability of the entire euro zone is called into question.

(LIST: The 10 Most Memorable Ads Featuring Celebrities And Their Kin)

Moreover, much of the borrowing by Portuguese companies has been financed by Spanish banks. That creates the possibility of a domino effect, whereby a financial squeeze in Portugal leads to a crunch in the Spanish banking sector. Moreover, the debt structure in both Spain and Ireland — with large amounts of private-sector borrowing — is similar to that of Portugal. Germany and the Netherlands are already balking at making further loans to Greece. And although Northern European countries could afford to bail out Portugal, their resources are limited. If a second country goes the way of Greece, several more might well follow.

Since Europe’s problems seem to have receded for the moment, U.S. investors are understandably focused on other risks — like conflict with Iran that could sharply push up oil prices, or fights over taxes and the federal budget in the run-up to the elections. But the danger of a European financial crisis has not gone away — and the ultimate costs could run to more than half a trillion dollars.

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Is a Greek Exit from the Euro Inevitable?

Posted by Admin on May 22, 2012

http://business.time.com/2012/05/21/is-a-greek-exit-from-the-euro-inevitable/

Is a Greek Exit from the Euro Inevitable?

By Michael Schuman | @MichaelSchuman | May 21, 2012

Kostas Tsironis / AP

For 2½ years, the world has been watching and waiting to see if debt-laden Greece can remain in the euro zone. Many have been doubtful since the beginning of the debt crisis. Greece’s government debt is simply too burdensome, the fiscal adjustment imposed on Athens is too severe, the Greeks are too resistant to the tough reforms that are necessary and the rest of Europe is too bullheaded to change its approach to suit reality. But for 2½ years, Greece has nevertheless managed to scrape by and remain in the monetary union, thanks to two European Union–IMF bailouts (totaling $300 billion), which have kept Greece on life support, and repeated promises to reform by Greece’s major political parties.

Now, however, the Greek debt crisis may finally be reaching the endgame. The likelihood of a Greek exit from the euro zone has been growing, and that has scary consequences for the rest of Europe as well as the global economy.

(PHOTOS: Protests in Athens)

The spiral toward disaster has been tipped off by Greek politics. A general election earlier this month eliminated what little hope remained that Athens could press through with the painful austerity measures and structural reforms demanded by the euro zone in return for bailout cash. The fractured result made it impossible for a government to form, and a new election has been called for June 17. But even if that poll brings some political stability, the odds that the bailout can go ahead as planned are practically zero. A vast majority of the votes in the last election went to parties that either want to renegotiate the terms of the bailout or ditch the agreement entirely. Whether the bailout scheme can continue will depend on the willingness of the rest of Europe to make concessions to Greece in a better, softer rescue agreement and the willingness of Athens’ politicians to agree to new terms. These are very open questions.

The problem is that without that rescue money, Greece will very likely have to exit the euro zone. The Greek government would quickly run out of money to function, leaving Athens no choice but to return to its national currency, the drachma. This scenario could unfold with surprising speed. Here are Bank of America/Merrill Lynch analysts on that score:

If no government is in place before June, when the next instalment from the EU/IMF is due, we estimate that Greece would run out of money sometime between the end of June and early July, at which point a return to the drachma seems to us inevitable.

Even if the Greek government gets its act together and the bailouts continue, there is another force steadily pushing Greece out of the euro zone. Greeks are removing their deposits from Greek banks. They have been doing this for a while, but the pace seems to have accelerated recently. In just one day last week, Greeks yanked some $900 million of deposits from the banks. This process is quaintly called a “bank jog,” but it is much more dangerous than a quiet run through a park. It is effectively a slow-motion run on banks, and a natural consequence of the uncertainty surrounding Greece’s tenuous position in the euro zone. If Greece is forced to ditch the euro and return to the drachma, Greeks know full well that their drachmas will be sharply devalued relative to the euro. So keeping their money in Greek banks now could result in a big hit to their welfare. Instead of facing that risk, Greeks are withdrawing money from banks to preserve their wealth.

(MORE: After the Fall: Greece’s Former Prime Minister Assesses the State of His Nation)

That makes sense from the standpoint of the Greek saver, but not for the banking sector. As Greek banks empty of euros, the financial system comes closer to failure. So far, the European Central Bank has been plugging the hole by acting as a lender of last resort to the Greek banking system. But there is a limit to how much financing the ECB might be willing to inject. Gavyn Davies of the Financial Times did a great job of explaining how this bank run is happening, and why the ECB could eventually fail to contain it:

The problem is that [ECB support for Greek banks] potentially exposes the ECB to much bigger losses than anything which has been contemplated so far by the core economies. Up to now, the ECB has been willing to inject liquidity to cover the financing needs of the periphery banks as the inter-bank market has dried up. If instead, they have to contemplate providing semi-permanent funds to cover large further withdrawals of bank deposits, the size and timescale of the injection becomes extraordinarily large.

If the ECB doesn’t continue to finance Greek banks, Athens could be forced to withdraw from the euro zone and restore its currency. That on its own would be destabilizing. But even more worrisome, the bank jog in Greece has the potential to become a euro zone–wide bank run. Seeing what’s going on in Greece, depositors in other weak euro-zone economies (Portugal, Spain, Italy) have the same incentive to yank money out of their banks. That could end with the total unraveling of the monetary union. The fears that this theoretical scenario will become reality are increasing in Europe. Here’s how economist Paul Krugman explained it in the New York Times:

Right now, Greece is experiencing what’s being called a “bank jog” — a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again. This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.

(MORE: Will Greece Need Another Election to Form a Government?)

How can the euro zone stop this from happening? It will require a degree of political commitment and policy flexibility so far absent from the zone’s approach to the debt crisis. When a national government confronts a run on banks, the way to solve it is to guarantee deposits and ensure that banks have enough cash to meet withdrawals. The problem with the euro is that individual national governments don’t have control over their own money. So the euro zone as a whole has to step in and back up the banks like a national government would. The euro zone likely requires some sort of guarantee scheme akin to the U.S.’s Federal Deposit Insurance Corp. But supporting the euro banking system is this way might demand yet more resources from stronger euro-zone economies like Germany. It would also probably entail more E.U.-level control over national banking sectors. Both steps would prove difficult.

More broadly, Europe can squelch the bank jog if it shows more commitment to the euro and keeping Greece in the union. The longer this period of uncertainty over Greece’s status drags on, the more deposits will flee Greece, and the more likely a euro exit becomes.

Clearly, a Greek exit from the euro zone would be traumatic for Greece and the rest of Europe, and send shock waves through global financial markets. But can a Greek exit from the monetary union really take down the euro itself? That’s a topic for another post …

MORE: Election of French President François Hollande Heralds End to Austerity

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Euro Crisis: Why a Greek Exit Could Be Much Worse than Expected

Posted by Admin on May 22, 2012

http://news.yahoo.com/euro-crisis-why-greek-exit-could-much-worse-082511184.html

Euro Crisis: Why a Greek Exit Could Be Much Worse than Expected

By MICHAEL SIVY | Time.com – 4 hrs ago

 At the Camp David G8 meeting last weekend, lip service was paid to keeping Greece in the euro zone. But economists who watch the continuing financial crisis in Europe are increasingly coming to two conclusions: Greece is likely to abandon the common euro currency now used by 17 European countries. And when it does, perhaps within a matter of months, there will be a damaging domino effect throughout much of Europe. Not all domino effects are created equal, however. And there are two possible consequences if Greece leaves the euro zone that few observers seem to have considered.

The scenario everyone recognizes is based on Greece reviving its traditional drachma currency. What this means is that salaries and prices within Greece would be converted from euros to drachmas, and then the drachma currency would be allowed to depreciate to make the Greek economy more competitive. The problem comes with debts that are denominated in euros, especially if the lenders are outside of Greece. These lenders would naturally resist being repaid with less valuable drachmas. However, if Greek borrowers have to repay the loans with euros, the debt would become more expensive for them to pay off after the drachma is devalued.

(PHOTOS: Protests in Athens)

The most likely domino effect, therefore — and the one most widely expected — is that debts to non-Greek creditors are compromised after Greece switches to the drachma. Either there would be lawsuits over which currency to use, or borrowers would default on the loans, or the lenders would be forced to accept reductions in the amount of the loan that has to be repaid, in order to avoid outright defaults. Whichever outcome occurs, the lenders lose money. Just as in the U.S. mortgage-lending crisis, once some banks lose enough money to become troubled, the contamination spreads to other banks, because they all lend to each other.

That’s not a pleasant prospect, but at least it’s fairly clear how to manage it. Greece leaves the euro zone, and its economy suffers for a couple of years but then stabilizes. With Greece gone, the rest of the euro zone could be propped up more easily. Many major banks take big losses on Greek debt. Some fail, some are taken over by stronger banks. Governments have to bail out the biggest losers. And the banking system is made sound again, although at considerable expense to taxpayers in many countries.

(MORE: Why Portugal May Be the Next Greece)

But what if Greece’s exit from the euro zone causes other kinds of domino effects that don’t have obvious precedents? The fallout could be a lot harder to control. As I see it, there are two possible scenarios that aren’t getting the attention they should.

Derivatives could set off a global chain reaction. Most people have heard of the complex, “synthetic” financial securities known as derivatives, which Warren Buffett famously referred to as “financial weapons of mass destruction.” In the case of bonds, these are known as credit derivatives. They include all sorts of loans secured by bonds, as well as incredibly complicated vehicles that amount to insurance policies if the bonds default. No one really knows how much of this stuff is sloshing around the international financial system, but the total value for all types of bonds was estimated at more than $50 trillion in 2008 and has continued to grow rapidly since then. Trouble is, if the bonds underlying these derivatives become questionable, all the derivatives become uncertain, too, even if they add up to far more than the value of the bonds themselves. Moreover, some of the synthetic investments based on Greek bonds could be governed by Greek law, some by British law (if anything originated in London), and some by U.S. law (if Wall Street was involved).

(MORE: Is a Greek Exit from the Euro Inevitable?)

What if one legal system accepts the conversion of euro loans into drachmas and another one doesn’t? Everything could be thrown into the courts for months. Even worse, if synthetic investments secured by Greek bonds become untrustworthy, why would anyone trust similarly complex investments involving Spanish bonds or Italian bonds?

The result of a meltdown in the world of derivative investments could cause far more chaos than simple bond defaults, not least because it would be almost impossible to figure out who owed how much to whom.

Greece recovers quickly and all the other troubled countries want out of the euro zone too. At the opposite end of the spectrum is the possibility that Greece abandons the euro and bounces back surprisingly fast. Paradoxically, that could cause another sort of disaster. Both Argentina and Iceland suffered currency collapses, and after a horrible year or two, both rebounded and were better off than if they had fought to save a failing currency. Analysts point out that both countries were big exporters of grain, meat or fish, and that sales boomed after currencies were devalued. But Greece, in its own way, could profit from a similar recovery — a rebound in tourism. A 30% drop in the exchange rate might make a vacation in Greece the best deal in years.

(MORE: The Future of Oil: The Environmental and Economic Costs of New Exploration)

So why would that be bad? Think of what it would mean for the other countries in the euro zone. How could the Italian government persuade its people of the need for higher taxes or the Spanish government explain soaring unemployment if Greece were obviously better off outside of the euro zone. Result: The entire European Union might unravel, with financial consequences many times greater than those resulting from Greece alone.

I’m certainly not predicting an extreme, doomsday scenario as the most likely outcome of a Greek exit. But it is important to realize just how unpredictable this situation is. In my own stock portfolio, I eliminated all the banks a long time ago and have largely stuck with financially strong companies that deal in essential goods — such as oil & gas, consumer staples and pharmaceuticals. The euro created a financial entity comparable in scale to the U.S., and if it gets into serious trouble the financial effects could be world-shaking.

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How Valencia reflects Spain’s economic crisis

Posted by Admin on May 19, 2012

http://in.finance.yahoo.com/photos/recession-in-spain-seen-through-pictures-slideshow/to-match-feature-spain-valencia–photo-1336628003.html

To match Feature SPAIN-VALENCIA/
A view of the City of Arts and Sciences, by architect Santiago Calatrava, is pictured in Valencia. The complex’s cost escalated from an initial 625 million euros ($808.93m) up to 1280 million euros, according to local media. ( REUTERS/Heino Kalis)
A panoramic view of the City of Arts and Sciences, by architect Santiago Calatrava, is seen in Valencia
Once the beacon of Spain’s new economic grandeur, the Mediterranean region of Valencia has become a symbol of all that is wrong with the country. (REUTERS/Heino Kalis)
The Palace of Arts Reina Sofia at the City of Arts and Ciences is pictured in Valencia is pictured in Valencia
The Palace of Arts Reina Sofia at the City of Arts and Sciences, by architect Santiago Calatrava. The palace’s cost escalated up to around 380 million euros, according to local media. (Heino Kalis/ Reuters)
A pedestrian walks past the Agora building and the Azud D'or bridge at the City of Arts and Sciences, designed by architect Calatrava, in Valencia
Agora building and the Azud D’or bridge at the City of Arts and Sciences.The cost of both structures escalated up to 150 million euros, according local media. (REUTERS/Heino Kalis)
A view of the City of Arts and Sciences, by architect Santiago Calatrava, is pictured in Valencia
A view of the City of Arts and Sciences. Years of free spending, coupled with a hangover from a burst real estate bubble and the collapse of local banks, have put Valencia on the brink of being bailed out by the central government – which has huge budget problems of its own. (REUTERS/Heino Kalis)
The Agora building at the City of Arts and Ciences is pictured in Valencia
The Agora building at the City of Arts and Sciences. The building’s cost escalated up to 86 million euros, according to local media. (REUTERS/Heino Kalis)
A view of the University and Polytechnic Hospital La Fe is seen in Valencia
A view of the University and Polytechnic Hospital La Fe is seen in Valencia April 25, 2012. The complex’s cost escalated up to 300 million euros. (REUTERS/Heino Kalis)
A building of the Universidad Politecnica de Valencia is seen in Valencia
A building of the Universidad Politecnica de Valencia is seen in Valencia April 25, 2012. (REUTERS/Heino Kalis)
To match Feature SPAIN-VALENCIA/
The control tower of the Costa Azahar airport is seen, one year after its official inauguration, near Castellon, in this April 24, 2012 file photo. The airport, whose cost escalated up to around 150 million euros, remains inactive due to construction failures, lack of permits and insufficient commercial interest from international airlines, according to local media. (REUTERS/Heino Kalis/Files)
Apartments for sale are seen, beside an unfinished block, in Valencia
Apartments for sale are seen, beside an unfinished block (back), in Valencia. The building sector’s implosion has forced into the open allegations that corrupt Valencian politicians, developers and bankers were in cahoots during a decade of easy money at low interest rates after Spain joined the euro in 1999. (REUTERS/Heino Kalis)
Demonstrators Protest European Central Bank Meeting
Thousands of Spaniards are protesting against austerity measures that politicians have proposed to ease the country’s economic crisis. (Left) A woman passes as police officers stand guard at Paseo de Gracia in the city centre as the European Central Bank (ECB) meeting is held at the Hotel Arts on May 3, 2012 in Barcelona, Spain. (Photo by Jasper Juinen/Getty Images).
A man rides his bicycle between policemen in riot gear who are guarding the venue of a meeting of the ECB in Barcelona
Click on Next to see images of daily life in Spain and public demonstrations across the country over the past year, protesting against the government’s spending cuts, labour market reforms, recession and overall economic crisis. (Image: Reuters)
People wait at a bus stop in front of an Asian shop after shopping in Malaga
People wait at a bus stop in front of an Asian shop after shopping in downtown Malaga, southern Spain May 4, 2012. The euro zone economy worsened markedly in April, according to business surveys. (REUTERS/Jon Nazca)
Homeless man walks at the financial district in Madrid
A homeless man walks at the financial district in Madrid April 19, 2012. France and Spain sold all the bonds they wanted at auction, though for Spain the cost was rising yields, indicating growing concerns the government will not be able to tame its deficit. After a brief respite fuelled by a trillion euros of cash the European Central Bank (ECB) lent Europe’s banks in December and February, markets are becoming nervous again about euro zone debt loads, with fears that Spain might follow Greece, Ireland and Portugal in needing a bailout from international lenders. (REUTERS/Andrea Comas)
Daily Life In Madrid Ahead Of General Elections
An unemployed man, Enrique, writes poems in return for a cash handout on the eve of the Spanish general elections on November 19, 2011 in the center of Madrid, Spain. (Photo by Jasper Juinen/Getty Images)
Demonstrations Against Eurozone Leaders' Agreed Pact For The Euro
Thousand of ‘indignants’ hold banners and shout slogans against the Euro zone leaders’s agreed ‘Pact For The Euro’ on June 19, 2011 in Barcelona, Spain. Thousands of Spaniards joined marches across Spain to protest against how the country’s economic crisis is being handled and the so-called “Euro Pact”, aimed at increasing the bloc’s competitiveness and economic stability. (Photo by David Ramos/Getty Images)
Economic Crisis In Spain Worsens As A General Election Looms
People queue up outside the Ave Maria charity food centre on November 9, 2011 in Madrid, Spain. Poor people and homeless are given a free breakfast at the centre run by the Fundacion Real Congregacion de Esclavos del Dulce Nombre de Maria. (Photo by Denis Doyle/Getty Images)
A protester, wearing an anonymous mask, protests after being prevented by police from gathering in Puerta del Sol square on August 2, 2011 in Madrid, Spain. The indignants were protesting high levels of unemployment, the austerity measures and what they consider a stagnant and corrupt political system. (Photo by Denis Doyle/Getty Images)
General Strike Hits Spain
A demonstrators sets fire to a barricade during rioting as a 24-hour strike is called, on March 29, 2012 in Barcelona, Spain. Spanish workers staged a general strike to protest the government’s latest labour reforms, which are designed to help Spain lower its deficit within EU limits. (Photo by David Ramos/Getty Images)
General Strike Hits Spain
Riot police walk past burning garbage containers during heavy clashes with demonstrators during a 24-hour strike on March 29, 2012 in Barcelona, Spain. (Photo by David Ramos/Getty Images)
Spanish Unions Protests Planned Government Cutbacks
People attend a demonstration organized by Unions against the financial cuts in health and education on April 29, 2012 in Madrid. Trade Unions CCOO and UGT called for a demonstration against the severe austerity plans of the Spanish government. In April, unemployment reached a record rate and the government has announced that immigrants with no legal status will not be covered by the health public services. The government aims to get the deficit down to 5.3 percent this year and 3.0 percent in 2013. (Photo by Pablo Blazquez Dominguez/Getty Images)
Spanish Unions Protests Planned Government Cutbacks
MADRID, SPAIN – APRIL 29: A girl carries a vuvuzela during a demonstration organized by Unions against the financial cuts in health and education on April 29, 2012 in Madrid. (Photo by Pablo Blazquez Dominguez/Getty Images)

People wait at a bus stop in front of an Asian shop after shopping in downtown Malaga, southern Spain May 4, 2012. The euro zone economy worsened markedly in April, according to business surveys. (REUTERS/Jon Nazca)

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Greek cabinet tackles austerity, rescue hopes rise

Posted by Admin on February 18, 2012

http://news.yahoo.com/more-needed-yet-elusive-greek-bailout-deal-005931736.html;_ylt=AkMlhwQqqjB3a4GMc3efm4Os0NUE;_ylu=X3oDMTNsYnRhaHM4BG1pdANUb3BTdG9yeSBGUARwa2cDN2E0ZWU3YTAtMzdlMC0zMTZkLTk1NjEtMzFhYjBlYWJiZTA5BHBvcwMxBHNlYwN0b3Bfc3RvcnkEdmVyAzMwMTljMDYwLTU5Y2MtMTFlMS05ZmVlLTM3Yzk5MWRiZTI3ZA–;_ylg=X3oDMTFvdnRqYzJoBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3

By David Stamp and George Georgiopoulos | Reuters – 4 mins 57 secs ago

ATHENS (Reuters) – Greece’s cabinet tackled on Saturday how to implement austerity demanded by the EU and IMF as a 130-billion-euro ($171-billion) rescue seemed within reach, while the euro zone considered modifying a deal with private creditors to help Athensreduce its huge debts.

After months of often acrimonious negotiations, Greek hopes were rising that euro zone finance ministers Monday will endorse the rescue which Athens needs to avoid bankruptcy next month when major debt repayments fall due.

A statement from the office of Prime Minister Lucas Papademossaid the cabinet would discuss implementing the bailout package which demands pay, pension and job cuts on top measures that have already hit many Greeks’ living standards.

The cabinet is due to approve measures that already provoked rioting on the streets of Athens last Sunday before they go into a supplementary budget due to be put to parliament next week.

“The Greek people have done everything they can and we are determined to make good on our commitments,” Public Order Minister Christos Papoutsis told reporters as he arrived. Many EU officials remain deeply skeptical of Athens’s will to reform.

Also on the agenda is the future of the old Athens airport, a prime seafront site that lies derelict more than a decade after the new airport opened, symbolizing the wasted opportunities which have helped to reduce Greece to its knees.

Friday German Chancellor Angela Merkel, Italian Prime Minister Mario Monti and Papademos all voiced optimism about a Greek accord during a three-way conference call, Monti’s office said in a statement.

However, Jean-Claude Juncker, who will chair Monday’s meeting of the Eurogroup in Brussels, made clear that urgent work was still needed to get a program to reduce Greece’s crippling debts back on track.

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Euro zone crisis in graphics http://r.reuters.com/hyb65p

Interactive timeline http://link.reuters.com/pys56s

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MISSING THE TARGET

At stake is a target of lowering the debt from the equivalent of 160 percent of annual Greek economic output now to a more manageable 120 percent by 2020.

“All the discussions I will have … until Sunday night will try to move the figure nearer to the target,” Juncker told reporters.

At the moment, EU and IMF officials believe that target – which assumes that Greece will run a budget surplus next year, excluding the massive cost of its debts – will be missed.

Under the main scenario of an analysis by the European Commission, the European Central Bank and the International Monetary Fund, Greek debt will fall to only 129 percent of gross domestic product in 2020, one official said.

The euro zone is therefore looking at modifying a deal negotiated over many months with private creditors under which they would accept a cut of around 70 percent in the real value of their Greek bondholdings.

Senior euro zone finance officials meet Sunday to discuss the analysis and find ways to bring the debt closer to the 120 percent target before the finance ministers gather Monday.

“If you do a number of things you can bring the 129 close to 120,” one euro zone official familiar with the document said.

These might include changes to interest accrued on privately held bonds, but the EU and its national institutions might also play their part, the official said.

Interest rates on EU loans to Greece could be cut, and those national central banks in the euro zone which hold Greek bonds might accept similar terms to the private creditors on some of their holdings.

The national central banks own an estimated 12 billion euros of Greek debt. The European Central Bank has refused to take part in the complex deal for the private creditors – involving swapping old bonds for new ones with a lower face value, lower interest rates and longer maturities – and would need to approve the national central bank decision.

Officials also are considering a cut in the cash “sweetener” which would be offered to the private creditors in return for accepting the cut in the value of their bond holdings

ROCK-BOTTOM MORALE

With Greek morale at rock bottom, the national mood darkened yet further after armed thieves looted a museum Friday in Olympia, birthplace of the Olympic Games. They stole bronze and pottery artifacts weeks after the National Gallery was burgled.

A Greek newspaper suggested the state could no longer look after the nation’s immense cultural heritage properly. “The Greek state has gone bankrupt, let’s face it,” the daily Kathimerini said.

“If the state cannot guard the country’s great cultural heritage for financial or other reasons it must find other ways to do it,” the conservative daily said.

“It could, for example, turn to large foundations and ask them to assume the cost of security at the country’s important museums in the next two to three difficult years.”

Critics say years have been wasted arguing and dithering over major national decisions. This is symbolized by the old Athens airport, which is supposed to be rebuilt as a Monte Carlo-style development of housing, tourist facilities and a marina, but remains a wasteland.

Athens opened a new airport in 2001, well in time for the 2004 Olympic games, but longstanding plans to privatize it have also yet to materialize.

(Additional reporting by Dina Kyriakidou, Angeliki Koutantou and Harry Papachristou and Jan Strupczweski in Brussels; Editing by Michael Roddy)

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