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Portfolio > Mutual Funds > Bond Funds

Greek Exit Fears Loom Again

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The troika rides again. Depending on the result of the review to be conducted this week by the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), Greece could end up being ridden right out of the eurozone.

Reuters reported Monday that the group has upped the pressure on Greece, with the EC saying that it was unlikely any more rescue funding would be provided before September. The troika is scheduled to return to Greece this week to review steps taken by the government to meet its bailout requirements, but the EC cited delays in pushing fiscal changes caused by, among other things, two rounds of elections earlier this year.

An EC spokesman was quoted saying, “The decision on the next disbursement will only be taken once the ongoing review is completed. Over the last few months, significant delays in program implementation have occurred due to the double parliamentary elections in the spring.”

He added, “The commission is confident that the decision on the next disbursement will be taken in the near future, although it is unlikely to happen before September.”

In the meantime, talk of a Greek exit is building again—particularly since on Friday the ECB for the second time this year halted its acceptance of Greek bonds as collateral for loans at least until the troika has completed its review. The cutoff will compel Greek banks to find funding from their own central bank and borrow, at a higher cost, Emergency Liquidity Assistance (ELA) funds.

The ECB chalked up the change in policy to the expiration of a temporary agreement by the ECB, Greece and eurozone leaders for the ECB to accept up to 35 billion euros ($42.369 billion) in Greek bonds after they went into default this year.

In a statement, the ECB said, “The ECB will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by Greece under the second adjustment program.”

In addition, the IMF has indicated that it won’t decide until at least August whether to release the next disbursement of funds to Athens. It already indicated in March, according to a Bloomberg report, that it will not provide additional funds to the country.

The move increases the pressure on the Greek government to push through additional cuts and taxes, something it is loath to do since the country is already laboring under what Prime Minister Antonis Samaras says is Greece’s own “Great Depression.” In comments on Sunday during a visit to Athens by former President Bill Clinton, Samaras said that five years of the hardships of recession “bring about bitter memories of the Great Depression in the United States. This is exactly what we are going through in Greece. It is our version of the Great Depression.”

Meanwhile, Germany is turning the screws tighter. As Greece tries to find more ways to cut its expenses and raise additional funds from a population already largely tapped out, Vice Chancellor Philipp Roesler of Germany said in a Sunday radio broadcast that he is “very skeptical” that the country will succeed.

“If Greece doesn’t fulfill those conditions, then there can be no more payments,” he warned, adding that the prospect of Greece departing the eurozone “has long ago lost its terror.”

His is not the only voice calling for dismissal of the country from the joint currency. On Monday Alexander Dobrindt, general secretary of the Christian Social Union (CSU), the Bavaria-based sister party of Chancellor Angela Merkel’s Christian Democrats (CDU), said that Greece should be cut off from further funding and should begin a return to its own currency.

He was quoted saying, “With Greece we have reached the end of the road. There must not be any further aid. A country which does not have the will to fulfil the conditions, or is not able to do so, must get a chance outside the euro.”

Further, he added, “Greece should start to pay half of its civil service wages, pensions and other expenditures in drachmas now. A soft return to the old currency is better for Greece than a drastic move. Having the drachma as a parallel currency would allow the chance for economic growth to develop.”

He did not offer any advice on how Greece was to do that without spurring bank runs and market chaos.

Greece has been hoping to renegotiate its bailout terms, something Germany is firmly opposed to. Berlin’s refusal to consider such an idea was reinforced over the weekend and on Monday by even more officials.

Foreign Minister Guido Westerwelle was quoted saying that his Free Democratic Party, the junior partner in Merkel’s coalition government, won’t agree to any attempts by Greece to overhaul its bailout terms. “That won’t work—that’s a Rubicon we can’t cross,” he was quoted saying. “It’s in Greece’s own hands to ensure it stays” in the euro.

Volker Kauder, CDU parliamentary caucus leader, was also quoted saying that “there will be no adjustment, also no more time.”

Finance Minister Wolfgang Schaeuble was quoted saying on Monday, “If there have been delays, Greece has to catch up.”


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