The Plot Deepens

This is a follow-up on the post i made last week about 

Greece’s problems with their debt payments.

Today it was reported that after the meeting on Friday between ECB chairman Jean-Claude Juncker and Greece finance minister Giorgos Papakonstantinou that the 110 billion Euro loan scheme will likely have to be extended and possibly expanded with new loans. The finance minister also concluded that Athens has abandoned its plan to reenter the marketplace to refinance its loans at the end of the year.

Source: editorialcartoonists.com

Less strict conditions on the agenda

The outcome of the meeting was quite clear; Greece wanted less strict conditions and two more years to reach the max 3% GDP deficit limit that was set for 2014. They also wanted lower interest rate levels from the loans provided by ECB and IMF. Greece rationalizes these demands by asserting that the stringent conditions currently imposed are hampering economic recovery and only with more relaxed conditions can the growth pattern be set back on a strong path. What many now fear is that if these relaxation demands are met, other countries that are facing default would follow suit.

Market reaction

The way the market reacted to this news was that the cost to protect oneself against Greece defaulting increased in the CDS market to 13.60%. That is double the cost in comparison with Portugal (6.43%) and Ireland (6.70%) which have also received loans. The rate on a ten year Greece bond increased to 15.89% which is five times what Germany have on theirs, 3.17%.

Taking into account this and the content of my previous post, I think it is just a matter of time before Greece have to restructure their loans, most likely sooner than many expected would be necessary. All we can hope is that the Euro group decides on a plan that would help Greece in the long run and not just look at their own short term interests. If this is not possible, I cannot see the Euro group surviving in the future; this could squander years of European diplomacy and cooperation.