By: Dr. Mike Campbell
The German Finance Minister, Wolfgang Schaeuble, has written to the ECB and the IMF arguing that the current funding facilities for Greece were insufficient and that unless further measures were agreed, a Greek default was a real possibility.
In his letter, Schaeuble notes that “"A return by Greece to the capital markets within 2012, as assumed by the current programme, seems more than unrealistic. This means the volume of the current programme is insufficient to cover Greece's financial needs. Against this background, I see the need to agree on a new programme for Greece."
The Minister proposed that Greece should benefit from a bond swap which would extend the time that Greece had to repay its debts by seven years. He suggested that the burden of such a new aid package would be shared between private investors and the tax payer. However, the lack of market confidence in Greece’s ability to repay its debts is what is causing the yield on Greek bonds to rise, so it is not immediately clear why private investors would support a move designed to reduce yields without the surety that a Greek default would not be allowed to happen.
The next tranche of the EU/IMF bailout will be given to Greece in the next few weeks. It seems increasingly likely that some further form of support will be provided to Greece, but this will probably come at the price of further austerity measures. Existing measures have provoked widespread protests from Greek citizens who feel that they are having to pay for their political master’s mistakes. Greek unemployment has risen by 0.3% to 16.2% between February and March. The figures reveal that 811340 people are without work; this represents a 40% rise on the figure of the previous year.