Still No Comprehensive Greek Aid Package
European leaders have put off a summit meeting originally scheduled for this coming Friday after German (NYSE:EWG) chancellor Angela Merkel argued that it was too soon to prepare a comprehensive package of measures to be taken in order to stabilize the euro zone. Leaders hope the extra time will allow them to work through the discordance surrounding the role of private investors in the second Greek bailout. The meeting will likely be rescheduled for some time next week.
Finance ministers from 17 countries in the Euro-zone failed to reach a comprehensive agreement for Greece’s second bailout package, which should total around 85 billion euros, when they met on Monday. Today the I.M.F. warned that Greece must act swiftly to get its public debt under control. “It is essential that the authorities implement their fiscal and privatization agenda in a timely and determined manner,” according to an I.M.F. report, which added, “the debt dynamics show little scope for deviation.”
Meanwhile, results of the latest European bank stress tests will be released on Friday, which in the wake of Portugal’s and Ireland’s recent credit downgrades and Italy’s (NYSE:EWI) economic struggles, is likely to be more bad news for markets. The test measures bank’s ability to withstand economic and market shocks, and if the results are poor, then they will only reinforce fears the banks remain weak. On a brighter note, Fitch Ratings cited Italy’s “absence of negative shocks, adherence to the fiscal targets set out by the government” as being consistent with stabilizing the country’s sovereign credit rating, giving them an AA-.
But whether to include bond swaps in the rescue, and how much creditors will have to sacrifice in a second Greek bailout are still major questions that have yet to be answered. The goal is to lighten Greece’s debt burden as much as possible, but that plan could lead credit ratings agencies to declare a selective default. The European Central Bank argues that the bailout money should be used to buy back Greek bonds at market rates, thus allowing private bondholders to be involved while avoiding any risk of default. But the I.M.F. maintains that any participation by bondholders in future bailouts could result in a selective default rating, if only for a short period of time.