Political pressure may force euro debt crisis resolution/Engagement key to Russian reform/Ash cloud is short-term noise/Trust raises dividend.
Last week saw no agreement either in Greece or amongst its Eurozone partners on how to secure an extension to the Greek support programme. Felix Martin, an economist within Thames River's Global Credit team, believes the sticking point is not whether Greece should get an extension to its programme (which seems to be broadly accepted as necessary), but how the costs of such an extension should be shared out between Eurozone taxpayers, private sector bondholders, and the Greeks themselves.
"The German government reiterated their position that any restructuring prior to 2013 is unacceptable. Since their position is also that there should not be any ‘Transfer Union', the implication is that the Greeks must either reduce their financing need (e.g. by increasing their austerity programme), or increase their contribution (e.g. from more privatisation). Other Eurozone countries think the private sector must also contribute through a ‘re-profiling' of Greece's debt." Martin (pictured) commented.
In Martin's opinion, the problem with either of these views is that they seem to be inconsistent with Greece's prima facie lack of longer-term creditworthiness: the Greek sovereign looks insolvent, and securing another year's financing will not solve the problem. The question therefore for both official and potential private sector lenders is why they would extend, or be bailed-in to, the existing programme, if it is not going to restore creditworthiness - in other words, if there is going to be a default anyway at a later date.
Martin anticipates that the outcome will in any case be driven by local political dynamics, concluding: "Following a week of youth protests in Madrid, Jose Luis Zapatero's Socialists suffered a disastrous string of results in the weekend's regional elections, whilst Angela Merkel's CDU fell to third place, behind both the main national opposition parties (SDP and Greens) in Bremen. Politicians in both borrower and creditor countries are under intense - and local - pressures from their constituencies; and it is these pressures, rather than any technical analyses of long-term economic prospects, that we believe will determine the end-game for the European debt crisis."
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