Greece: No second bailout, no euro

Posted: January 04, 2012

ATHENS, Greece - Greece's government warned Tuesday that the debt-crippled country would have to ditch the euro if it failed to complete the details of its second, $169 billion international bailout and that more austerity measures may need to be implemented.

A key component of the package, which was agreed to in October, is that Greece has to persuade its private creditors such as banks and investment firms to take a steep hit on the value of their holdings of Greek debt. Greece has the highest debt burden relative to the size of its economy in the whole of the 17-nation eurozone and the write-down will help get it down to more manageable, though still high, levels.

Greek government spokesman Pantelis Kapsis said that negotiations in the next three or four months with international debt monitors would "determine everything," including whether Greece escapes a disastrous bankruptcy.

Greece is being kept afloat by a $142 billion international bailout agreed to in May 2010, after investors shocked by the country's huge budget deficit and debt mountain demanded sky-high interest rates to continue buying Greek bonds.

An additional rescue package was agreed upon in October, after it became clear that the first batch of funds would not suffice, but that deal has yet to be completed.

Sorting out the details of the bailout is the main task of the coalition government headed by former central banker Lucas Papademos, whose short mandate is expected to expire in early April.

"This famous loan agreement must be signed, otherwise we are outside the markets, out of the euro, and things will become much worse," Kapsis told private Skai TV.

In return for its first batch of rescue loans from its European partners and the International Monetary Fund, Greece had to adopt deeply resented austerity measures to contain its budget deficit - set to hit at least 9 percent of GDP for 2011 despite repeated spending cuts and tax increases.

Kapsis said further cutbacks, possibly including new taxes, might be required to address a revenue shortfall. "I . . . don't believe it is easy to impose new taxes, but what does cutting spending mean? To close down the public sector?"

Getting final approval of the new bailout has been delayed because talks with Greece's private creditors over a huge bond swap, designed to cut Greece's debt by some 100 billion euro (about $130 billion), have dragged.

While representatives of banks and insurance funds that hold a lot of Greek debt tentatively agreed in October to cut the face value of their holdings of Greek bonds by 50 percent, they have so far failed to agree on crucial details of the deal.

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