Still No Deal in Greece, Germany Denies Expansion of Bailout, Portugal is a Problem

Negotiations with Greece’s bondholders continue to be at the forefront of the crisis in Europe. Although IMF Chief Christine Lagarde went public yesterday with her belief that a deal will eventually get done; Eurozone finance ministers rejected the latest offer from Greece’s private sector bond holders yesterday. Finance ministers told the investor group that the proposed coupon rate of 4% on the new debt was simply too high.

In their purportedly last and best offer, the bondholders had said a 4% coupon on new debt was the least they could accept. However, according to reports, Eurozone Chairman Jean-Claude Juncker noted that "Ministers asked their Greek colleagues to pursue negotiations to bring the interest rates on the new bonds to below 4% for the total period, which implies the interest comes down to well below 3.5% before 2020."

One of the key areas of concern for the finance ministers reportedly is the fact that given a 4% rate on the new debt, the IMF has forecast that Greece's debt levels would be significantly above the debt-to-GDP target level of 120% by the year 2020.

Although there has been no response yet from the IIF (the group representing the private bond holders), negotiations are expected to continue.

According to reports, the Greek Finance Ministry said yesterday in a statement that it expected to present a formal offer to creditors by February 13th. As such, it appears that there is no imminent end to negotiations in sight.

On the topic of increasing the firepower of the bailout funds, yesterday’s big news was that Germany said it was open to generating a bigger firewall. The FT broke a story yesterday afternoon, citing German and Eurozone officials, who said that German Chancellor Merkel may be prepared to let the EFSF run in parallel with its permanent successor, the ESM.

According to the FT, this would give the Eurozone a combined €750B in bailout firepower (€250B in unused funds from the EFSF, plus the €500B from the ESM). The FT reported that in return for this concession, Merkel wanted Eurozone governments to agree to stricter rules regarding budget deficits and public sector debt.

However, Reuters is reporting this morning that Germany has denied that it is ready to ramp up bailout mechanism: Reuters reported that Germany denied the FT report, citing comments from Chancellor Merkel's spokesman, Steffen Seibert, who told Reuters that "It is not true. There is no such decision."

As far as the IMF is concerned, Managing Director Christine Lagarde discussed the potential for a quid pro quo. Reuters is reporting today that Lagarde said in an interview on Tuesday that IMF members may be willing to ramp up the fund's resources if Eurozone states agree to boost the size of their own bailout fund. Reuters says that Lagarde continued to say that the Eurozone's bailout mechanism needs to be increased.

Finally, concerns are mounting that Portugal will need another bailout and may be looking to follow Greece’s lead in terms of restructuring its existing debt. The WSJ reported Tuesday that investors, economists and politicians are increasingly concerned that Portugal will need a second bailout. The Journal article noted that a big concern is the country may not be able to raise capital in the bond market next year without assistance. Recall that under the current IMF bailout plan, it is expected that Portugal would be able to use the open market to repay €9 billion in debt that comes due in 2013.

The Journal also notes that Portuguese bond yields and CDS have reached record levels. This, of course, is exacerbating fears that the country's bondholders may be forced to take hard losses on their current holdings.

The situation in Portugal bears watching closely in the coming days and weeks.

 

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