Greece Get $17 billion Bailout Package

The European Union approved the disbursement of it's last $17 billion tranche of bailout funding Saturday, putting Greece's debt crisis at bay -- for now.

With the last part of the $156 billion bailout package in place, the struggling nation will be able to keep functioning for a little while longer. The disbursement, which will be made by July 15, follows the Greek Parliament's approval of new austerity measures.

This latest piece is the fifth tranche of a bailout that was approved by members of the European Union last year.

"The Greek authorities provided a strong commitment to adhere to the agreed fiscal adjustment path, and to the growth-enhancing structural reform agenda, which are essential components of our strategy to restore fiscal sustainability and safeguard financial stability," ministers said in a statement Saturday.

European officials will now work on a second proposed bailout.

The bailout is a highly contentious subject in Greece. As the Greek Parliament voted in favor of the funding on June 28, thousands of protesters descended on Athens and clashed with riot police. Tear gas choked the streets as protesters and police pounded each other with clubs and firebombs.

Greece: Back from the brink - for now

However, the bailout won't take care of the nation's long-term budget problems, according to Mark Blyth, an economics professor at Brown University in Providence, R.I.

"This is simply giving them more breathing space, while they're kicking the can down the road," Blyth said, referring to the bailout. "They need to have enough money to cover the primary fiscal debt, and for keeping the lights on at the hospitals and military bases. Once they've got that, they're able to default without shutting down the country."

Blyth believes that a Greek default is inevitable. "Ultimately, there's no way the Greeks can pay back what they've borrowed," he said.

The debt-ridden nation has "heavy near-term financing requirements," according to S&P, with about $135 billion in government debt maturing between now and the end of 2013. An additional $82 billion is set to mature in 2014.

Still, the rest of Europe does not want Greece to default, because it would rupture the bond market and undermine the European banking system so severely that the repercussions could be felt on Wall Street.

Greek austerity: Cure or poison?

The French banking association and the German Finance Ministry, as well as German banks, have offered proposals to keep the Greeks from defaulting on $152 billion worth in bonds.
These proposals offer different variations on the same theme: rolling over Greek debt. As explained by Barclays (BCS), one of the options is to roll the debt into a 30-year bond, with at least 70% backed by private sector investors.

For the Greeks, there is one part of their future that is crystal clear: more austerity. In order to qualify for the final tranche of the bailout, the Greek Parliament had to agree to a new raft of austerity measures, in addition to the ones that were imposed on the Greek people last year. This is why people were rioting in the streets of Athens.

Since 2010, the Greeks have faced a myriad of austerity measures including pension cuts, a boost to the sales tax, excise taxes on fuel, cigarettes, alcohol and luxury goods, more stringent eligibility for disability benefits, and a hike in the retirement age to 65 from as low as 61.
On June 29 and 30, the Greek Parliament approved a new raft of austerity measures that included reducing the pay of public workers, increasing the attrition of public jobs and ramping up taxpayer compliance.

Tax dodging, in particular, is one of the most chronic fiscal problems in Greece. Many of the protesters in Athens blame rich tax evaders for their nation's troubles. The protesters -- particularly the young and unemployed -- believe they're being forced to shoulder an unfair burden to get their country out of hock.

The pain of Greece's crisis

Marko Mrsnik, the lead analyst in the recent Standard & Poor's downgrade of Greece, blames the austerity measures for exacerbating the shoddy job market. The unemployment rate has soared to 16.2%, compared to 11.6% in March 2010, he said.

The contradiction of the austerity measures is that they're harming the economy even as they're keeping it afloat, according to Jurgen Odenius, a strategist for Prudential Fixed Income.

Greece: Back from the brink

Greece has pulled itself back from the brink, by agreeing to a painful austerity package aimed at reducing the country's giant budget deficits.

On Thursday, the Parliament voted to implement those unpopular reforms. The vote set the stage for the nation to secure the final $17 billion of a $156 billion international relief package.

The latest cash infusion means Greece will be able to stave off an immediate default and pay its bills for the next three months.

But Greece is not out of the woods. The country still needs to put the unpopular reforms into practice, negotiate with creditors and privatize big public institutions.

Passage of the austerity plan "will certainly give some short-term relief to markets," said IHS Global senior economist Diego Iscaro. "But concerns about the long-term feasibility of Greece's fiscal plans still remain in place."

Greece is now expected to begin negotiations with the European Union and International Monetary Fund for another bailout, said Wolfango Piccoli, a director at the Eurasia Group in London.

The next round of emergency aid is expected to range between $172 billion and $216 billion, which would cover Greece's expenses through 2014, he said.

As with the previous deal, the new package will come with conditions. The terms are expected to include some concessions by Greece's creditors and the transfer of state assets to the private sector.

But providing more short-term support for Greece "is just kicking the can down the road," Piccoli said.

Officials in Europe are hoping to keep Greece solvent long enough to allow other troubled European nations to strengthen and put pressure on Greece to enact the painful reforms passed Wednesday.

At the same time, the European Union is working with Greece's main creditors -- French and German banks -- to roll over some of the nation's debt into longer-term bonds.

"It's unclear how that will be done, though there seems to be some willingness there," on the part of the banks, said Piccoli. "But that's just another measure to gain time, it doesn't diminish the amount of debt that Greece will be left with."

The bottom line is that Greece's ability to repay its debts remains in question.

"For all economic intents and purposes, Greece has already defaulted," said Sandeep Dahiya, professor of finance at Georgetown's McDonough School of Business. "There's no way Greece can repay all the money it owes."

The big worry is that other debt-laden nations in Europe -- particularly Ireland, Portugal, Italy and Spain -- would be dragged down if Greece were to default in a disorderly way.

But the threat to the U.S. economy, for now, remains remote.

That's mainly because U.S. banks have relatively little Greek debt on their books and the financial markets have largely priced in Greece's fiscal problems, which have been playing out for over a year.

Nevertheless, the situation remains highly uncertain.

Greece austerity: Cure or poison?

"We're still not sure how much exposure there is," said Gus Faucher, an economist at Moody's Analytics. "There is certainly the potential for a big problem in the U.S. if Greece were to default unilaterally."

While he believes that's unlikely, Faucher said an outright default by Greece could cause a financial shock similar to the one that occurred after Lehman Brothers collapsed in 2008.

The investment bank's implosion roiled global financial markets and caused a severe credit crisis.

Analysts say U.S. money market funds, which hold an estimated 40% of their assets in various forms of European debt, would be the most vulnerable in such a scenario.

The pain of Greece's crisis

Ben Bernanke, chairman of the U.S. Federal Reserve, said last week that the central bank is looking into how exposed U.S. money market funds are to Greece. He acknowledged that the indirect exposure could be "very substantial," but sounded hopeful that the worst won't come to pass.

In addition, some U.S. investment banks and insurance companies could be on the hook if they own credit default swaps linked to European debt.

These complex derivatives, which crippled US insurance giant AIG after Lehman fell, could also yield big profits for investors betting against Europe.

However, the market for credit default swaps is opaque and analysts say it's impossible to pinpoint how exposed U.S. institutions may be to them.

European stocks surge on Greek austerity vote

European stock markets extended strong gains on Thursday following Greece's approval of austerity measures needed to unlock critical bailout funding and stave off a debt default.

London's benchmark FTSE 100 index of top shares jumped 1.53 per cent to 5,945.71 points, while in Frankfurt the DAX gained 1.13 per cent to 7,376.24 points and in Paris the CAC 40 climbed 1.48 per cent to 3,982.21 points.

"The recent rise in European markets has continued today as markets end the month, quarter and first half of 2011 on a positive note, with oil and banking sectors leading the gainers as fears about an imminent Greek default get pushed out beyond the release of the next tranche of bailout funds," said CMC Markets analyst Michael Hewson .

The Greek parliament approved Thursday measures to implement 28.4 billion euros ($41 billion) in unpopular budget cuts and tax hikes despite street protests that turned violent this week.

The EU quickly said in response that Greece had now met conditions for the release of the next installment of 12 billion euros of bailout funds under under its 110-billion-euro EU-IMF bailout package agreed last year.

Athens faced the prospect of default in July if the bailout funds had been held back.

The Greek vote will also allow talks to proceed on a second bailout package expected to total a similar amount to ensure Athens has sufficient funding for the next three years.

News that German banks will take part in a second Greek debt rescue package also helped improve market sentiment, as did moves by Portugal and Italy to further tighten their budgetary belts.

Brussels ended the day up 0.97 per cent, Amsterdam rose 1.3 per cent, Milan climbed 1.62 per cent, Madrid jumped 2.13 per cent and Lisbon soared 3.03 per cent.

London was also supported by news that Lloyds bank will axe 15,000 more jobs and that the London Stock Exchange is once more a likely takeover target.

Lloyds, which is 41-per cent state-owned after a massive bailout, said it will axe 15,000 jobs in a drastic cost-cutting plan that will halve its international base and save £1.5 billion (1.66 billion euros, $2.4 billion) per year by 2014.

In response, LBG rocketed to the top of the FTSE 100 index, gaining 9.73 per cent to 49 pence as investors welcomed news of the measures.

Off the FTSE 100, the London Stock Exchange saw its share price jump 10.98 per cent to 1,061 pence, one day after The LSE and Toronto's bourse scrapped plans to merge after failing to win support from two-thirds of their shareholders.

"Shares in the London Stock Exchange rallied .. as investors speculated that the firm may become bid prey to Nasdaq OMX, having seen its multi-billion bid for Canada's TMX fall by the wayside," said analyst Giles Watts at City Index.

Nasdaq failed to take over LSE in in 2006 and 2007.

"Investors are now speculating that the firm's failure to secure a deal with the Canadian Exchange operator at a time of huge competition and subsequent consolidation within the sector makes it vulnerable," Watts added.

Wall Street also rallied on the Greek vote, with the Dow Jones Industrial average gaining 1.18 per cent to stand at 12,406.05 points at 1600 GMT.

The broader S&P 500 rose 0.94 per cent to 1,319.74 points, while the tech-heavy Nasdaq Composite climbed 1.19 per cent to 2,773.21 points.

Asian stock markets closed higher on Thursday after Greek lawmakers gave preliminary approval on Wednesday to the key package of spending cuts and tax hikes aimed at helping Athens avoid a catastrophic default.

Hong Kong gained 1.53 per cent, Tokyo added 0.19 per cent, Shanghai was up 1.23 per cent and Sydney rose 1.73 per cent.