How Greece Problems Can Be Solved? Update: The Germany Green Party said that the Greece bailout could cost 160 billion.
The yield on Greece’s two-year bonds rose from 7.5% to 13.5% as Standard and Poors (S&P) cut the credit rating of the nation’s sovereign debt to junk and downgraded Spain’s bonds two levels from A+ to A-. The market has seen many participants looking to dispose of their euro holdings over the past three days. Investors are worried that Greece’s financial problems will not be resolved and the country will be forced to leave the Eurozone, the alliance of European Union countries that have agreed to use the euro as their official currency. Even worse is the possibility that Greece will ultimately default on its debt obligations.
In the meantime, international economists and bond investors are concerned that the sovereign debt crisis could impact other Eurozone countries such as Italy and France. Years of reckless spending and borrowing have left these countries, among others, on the verge of financial ruin since the beginning of 2010 – not to mention in flagrant violation of inflation and deficit limits set by the European Central Bank. Accordingly, each time currency traders rapidly sell their euro holdings over anxiety about their national budgets, the borrowing costs of these nations rise. Higher borrowing costs means higher debt service, the cash required to repay the principal and interest payments owed, which countries saddled with high deficits they cannot afford. There is also concern that financial support for Greece by the Eurozone or another economic agency such as the International Monetary Fund (IMF), may serve as dangerous precedent for other financially week nations. Greece’s bailout, which may be as high as 45 billion Euros for the next 3 months, would cause a “moral hazard” for these nations who may have otherwise sought internal solutions for their financial woes.
The IMF is considering upping its commitment to the bailout by 10 billion Euros (a total of 110 billion Euros). Its increased support would help bridge the gap created as the Eurozone began to back away from its offer of financial support to Greece. The IMF is aware that a 45 billion Euro bailout from the European Union may not be enough to support Greece for more than a few months if things continue to trend downward.
To solve the Greek financial crisis, at least for the next year, several things would have to happen within the next month:
1. Germany would have to make a hard commitment of at least 15 billion Euros for the bailout. That would leave the IMF, which is ready to increase its commitment, and the other Eurozone nations to fund the balance. Germany is the largest nation in the alliance based on gross domestic product (GDP) by a wide margin. Germany
This is a hypothetical fact pattern and does not reflect in any way the opinion of the National Black Law Students Association. Any such assumption or inference would be incorrect.
Chancellor Susan Paul would be taking a huge political risk because the Greece bailout is unpopular in her nation; some polls show that 70% of the population is against it. Because both houses of the German parliament would have to approve bailout funds, Paul would be forced to call an emergency meeting of the nation’s legislature. To obtain Parliament’s backing, she would have to make a compelling case that the collapse of Greece would result in a collapse of the Euro, which is Germany’s de facto currency. She would also have to demonstrate that German banks have large exposure to Greece debt. There is no Greece bailout without Germany. Its size makes its participation essential.
2. The IMF would have to provide another 10 billion Euros toward supporting Greece and make it clear to the Eurozone nations that the commitment is fixed in stone. It would have to be the “first money in”, showing that the IMF is willing to risk capital on Greece. The agency would then have to call on the Eurozone nations to make good on their promise of support or be labeled as the agents that caused the potential collapse of the alliance.
3. Greece would have to agree to have a compliance commission, probably appointed by the IMF, to oversee the process of working toward balancing the budget. A commission with power would show Greece’s commitment to dropping its deficit-to-GDP ratio. The appointment of a commission would be a humiliating setback for the Greece government. However, many doubt Greece’s ability to navigate the road to fiscal recovery on its own. The commission would be a necessary part of any funding obligation. Greece must either accept oversight or face the consequences of default.
4. The IMF and Eurozone would need to eliminate the moral hazard threat by refusing to assist other countries. The bailout stops with Greece. If another nation in the alliance decides to attempt to use Greece as leverage, their requests for help will be rejected. That would mean a default by Spain, Italy, or France would probably cause the dissolution of the Eurozone alliance, an event that the nations in the alliance would have to accept. The line must be drawn with Greece.
This is a hypothetical fact pattern and does not reflect in any way the opinion of the National Black Law Students Association. Any such assumption or inference would be incorrect.
The following parties will be present at the bargaining table: Team 1: Greece Nikolaos Venizelos, Greece Finance Minister. Nikolaos is poised to be the next Prime Minister as member of the ruling party. As a former banker and entrepreneur, Nikolaos has achieved great success in guiding the Greece Senate to this stage on the matter as head appointee on the Prime Minister’s Financial Reform Committee. Spiros Simitis, Chief Advisor to the Prime Minister. Spiros has been by the embattled Prime Minister’s side for 20 years. With the Prime Minister at his weakest point, he will do everything to help his friend and former business school classmate.
Team 2: European Union Nadja Dill, Germany Finance Minister. Nadja is filling a new role. Her Chancellor has made it clear that she will not save Greece at the expense of other EU countries. Ashley Mousseau, President of the European Council. Ashley must garner the support from all the EU countries. News reports have continued to circle about how this is her chance to prove herself. Many EU Finance Ministers have been critical of her job to this point.
Issues The negotiating parties must resolve the following issues: 1. 2. 3. 4.
How much of the Greek €360 billion debt will be reduced? Will the Prime Minister step down? What will be the new retirement age? What other measures will be adopted?
Consensus must be reached on all issues listed to consider the negotiation a success. Parties are encouraged to think creatively in finding a resolution.
This is a hypothetical fact pattern and does not reflect in any way the opinion of the National Black Law Students Association. Any such assumption or inference would be incorrect.