Greece Aid - Greece Investment for Greece Culture

Greece aid has been the focus of the European debt crisis. It has been cloaked in talk of debt ratios, budget schemes and banking cabals. Never is there a mention of Greek culture or a Greece investment. Surely Greece's role in history, in philosophy and the arts should have some bearing? In sport Greece was ho,me for both the ancient and the modern Olympics.

The massive EU loan package to Greece is indeed the largest ever multilateral rescue of a sovereign nation. Wolfpack traders put so much pressure on Greece selling their financial assets that Greece was pressured to ask for emergency aid or risk default. Economic contagion fears were growing by the hour. All of the so called PIIGS, Portugal, Italy, Ireland, Greece and Spain debt markets came under pressure. The massive debt exposure of these nations proving a millstone around Europes neck. 

The currency and bond markets spent the first half of 2010 speculating whether Greece would default. Their massive sovereign debt totaled over 300 billion Euro. It seemed default or take up the Euro Zone emergency bailout option. Greece Finance Minister George Papaconstantinou formally requested the bailout option asking the Euro Zone nations and the International Monetary Fund to provide emergency loans to them on Friday. 

The crisis snowballed very quickly as financial contagion tends to. The Euro was sold off aggressively. The Euro hit yearly lows against the US dollar on the selling. The Euro also saw multi-year lows against other currencies. The Greek bond market continued to collapse as default fears grew. Greece bond spreads were trading like junk bonds not Sovereign bonds.

Greek Credit Default Swaps (CDS) had blown out to record levels as the market bet on a Greece collapse. The sharks were circling and the wolves could smell blood. CDS were created as a form of insurance from default.  They have become another derivative that speculators seek to profit from. Greece culture or Greece investment factors became irrelevant to a cusip bond number or financial model trading program. The markets spent the first half of 2010 building up positions to benefit from a  Greece default.

Greece Finance Minister George Papaconstantinou by formally requested the bailout option thwarted the CDS speculators for now. There are arguments for and against default given Greece's predicament. One wonders whether Greece culture and it's place in world's history will receive any consideration.

The request and crisis has rattled the once stoic image of the 16 nation European currency. Forming the Euro was meant to avoid all this. European Sovereign Ratings are now under siege as the Greece crisis puts the spotlight on future European debt contagion. It seems the great European social experiment has come home to roost. We wait to see how this one plays out. 

The structure of the emergency aid is due to Greece being unable to finance its massive debts through the credit markets. Euro zone finance ministers determined the terms of the agreement. The first tranche of the EU/IMF emergency aid of the 45 billion euro (US$60.49 billion) is expected to be delivered by May 19. Papaconstantinou saying ‘We expect to have funds from the mechanism before May 19’ confirmed this. The financing will be provided as three-year stand-alone loans.

Greece’s Lenders

The parties lending to Greece are a combination of the members of the Euro zone and the International Monetary Fund. The allocation is as per the member states respective holdings in the European Central Bank capital. ECB capital is from the national central banks of all EU Member States. The ECB capital is €5,760,652,402.58 per their website. The share is determined by each country’s share in the total population and gross domestic product of the EU in equal weightings.  This percentage is recalculated by the ECB every five years or when a new country joins the EU.

The euro zone will provide two-thirds of all loans requested by Greece with that two thirds determined by the National Central Bank allocation per Table 1. The IMF will provide the other third.

Table 1: Euro area National Central Banks (as of 1 January 2009)

Member State NCB Capital key %  Paid-up capital (€)

Austria - Oesterreichische Nationalbank
NCB Capital key %   1.9417
Paid-up capital (€) 111,854,587.70
 
Belgium - Nationale Bank van België / Banque Nationale de Belgique
NCB Capital key %   2.4256 
Paid-up capital (€) 139,730,384.68

Cyprus - Central Bank of Cyprus
NCB Capital key %   0.1369
Paid-up capital (€) 7,886,333.14
 
Finland - Suomen Pankki - Finlands Bank
NCB Capital key %   1.2539
Paid-up capital (€) 72,232,820.48
 
France - Banque de France
NCB Capital key %   14.2212
Paid-up capital (€) 819,233,899.48
 
Germany - Deutsche Bundesbank
NCB Capital key %   18.9373
Paid-up capital (€) 1,090,912,027.43
 
Greece - Bank of Greece
NCB Capital key %   1.9649
Paid-up capital (€) 113,191,059.06
 
Ireland - Central Bank and Financial Services Authority of Ireland
NCB Capital key %   1.110
Paid-up capital (€) 763,983,566.24
 
Italy - Banca d'Italia
NCB Capital key %   12.4966
Paid-up capital (€) 719,885,688.14
 
Luxembourg - Banque centrale du Luxembourg
NCB Capital key %   0.1747
Paid-up capital (€) 10,063,859.75
 
Malta - Central Bank of Malta
NCB Capital key %   0.0632 Paid-up capital (€) 3,640,732.32
 
Netherlands De Nederlandsche Bank
NCB Capital key %   3.9882
Paid-up capital (€) 229,746,339.12
 
Portugal - Banco de Portugal
NCB Capital key %   1.7504
Paid-up capital (€) 100,834,459.65
 
Spain - Banco de España
NCB Capital key %   8.3040
Paid-up capital (€) 478,364,575.51
 
Slovakia - Národná banka Slovenska
NCB Capital key %   0.6934
Paid-up capital (€) 39,944,363.76

Slovenia - Banka Slovenije
NCB Capital key %   0.3288
Paid-up capital (€) 18,941,025.10
 
Total NCB Capital key %   69.7915
Total Paid-up capital (€) 4,020,445,721.56

Greece will receive 30 billion euros from the euro zone in year one.  The amounts for 2011 and 2012 have not been determined. The Greece needs is unpredictable as evidenced by Eurostat revising the Greek budget Deficit projections on Thursday.This action triggered the Euro fall and widening of the Greek/German Bund spread which pushed Greece to ask for emergency aid. Eurostat has said they expect further revisions.

This continued uncertainty about total funds available will continue to weigh on credit and currency market sentiment.'The need to have the mechanism activated emerged after developments in the last days, particularly the deficit revision by the EU and the downgrade (by Moody's),' the minister said.A senior Greek finance ministry official spooked the markets earlier saying the emergency loans could reach 80 billion euros. He later corrected this but such slip ups usually come from somewhere.

The official expects the IMF to lend Greece at least 10 billion euros in 2010. He also said that ‘logically’ the package would be ‘significantly’ more than 40 billion euros over the three years. 

The rationale behind Greece enacted the emergency aid is because market forces and pushed the cost of borrowing to record levels. Under the terms of the euro zone package the costs to Greece will be significantly less. The loans will be a combination of variable and fixed rate. The variable component will be based on three-month EURIBOR rates; the fixed-rate component based on EURIBOR swap rates for the relevant maturities.

The loans are not without penalty here will be a charge of 300 basis points. This is significantly less than the market where on Thursday Greek bond 3 years spreads were at 870 and 5 year CDS were at 565. For loans of longer than three-year maturation there will be an additional 100 basis points charged.

There will also be a one-time service fee of a maximum 50 basis points charged to cover operational costs to conform with IMF charges,

The hold up on loans and cat and mouse games that Greece had played up onto the historic request for Emergency aid was because Greece and baulked at austerity measures that EU member states, in particularly Germany had stated were conditional on the loans.

However euro zone sources according to Reuters have said Greece would not be asked this year to make deeper cuts in its budget deficit than has already promised. Analysts have shown concern about this apparent back down, though it is an emergency loan and logic would dictate there are limitations on initial demands.

The conditions will be in line with Greece plans to reduce its deficit by 4 percentage points in 2010. On Thursday April 22 Eurostat revised the Greek budget deficit for 2009 higher to between 13.6 percent and 14.1 percent of GDP. The European Commission announced after this revision, which rattled the markets Greece deficit cutting efforts, must be intensified in 2011 and 2012 with targets.

The primary obstacle to Greece aid is that the EU and IMF bilateral loans need parliamentary approval. This is expected with many member states expediting the issue through parliamentary economic committees.

Germany is the largest and most powerful member of the EU but market chatter is that the German government has assured the Euro group that according to their legal research there was no danger of losing the case for approval. The IMF does not require parliamentary approval, meaning the disbursement IMF funds could be much faster.

The White House in a statement said they backed Greece's activation of a EU/IMF aid package. White House spokesman Robert Gibbs also said the U.S. Treasury Department was closely monitoring the Greece request and markets. 

Many analysts and market pundits are concerned that the emergency aid has been granted without taken a hard stance on Greece’s long term financial woes and fractured credit system.

'The request for aid removes uncertainty in the markets that Greece will not have funding,' Papaconstantinou said.

Papaconstantinou said that Greece has covered its funding needs for April at a significantly higher cost because of the Squeeze on Greek bonds. Next month their borrowing requirements are to cover an 8.5 billion euro government bond.

Papaconstantinou made an effort to pacify the markets, the Euro and stock markets responded positively. He stressed Greece would not be restructuring its debt and reiterated 'There is no such issue, I say it categorically, it was not discussed in the meetings we had (with EU and IMF officials).'

Next stage in the Greece aid saga is Papaconstantinou meeting with IMF chief Dominique Strauss-Kahn in Washington over the weekend. For the market it will be how Greek Bonds react and the other PIIGs (Portugal, Ireland, Italy and Greece). Greece asks for emergency aid was a headline many people expected and dreaded because of the contagion affects to the PIIGs and the rest of Europe. Greece investment is no doubt on hold for now. Greece culture has ridden through much turmoil over thousands of years. One suspects in a few years this will be remembered as just another in Greek history.