By: Michelle Caruso-Cabrera
CNBC Senior International Correspondent
In his first and only interview since taking office, Greek Prime Minister Lucas Papademos took straight aim at those who suggest Greece should abandon the euro and return to the drachma as a way to solve the country’s fiscal crisis: “This is really not an option.”
Papademos also expressed complete confidence in his country’s ability to get through what is likely to be a harrowing two months as it approaches a 14.5 billion euro debt repayment in MarchTwo different financial deals must be negotiated before then. Without both, his country is likely to default—which would make it the first in the euro zone to do so, not to mention the largest sovereign default in history.
Greece is at the epicenter of the European financial crisis and how Papademos handles the situation is being closely watched by market participants around the world.
Failure on his part and on the part of the Greek government to manage their debt crisis is an orderly way, would have economic consequences across the European Union.
But Papademos is unperturbed. And he thinks the country is well on the way to avoiding a March default.
“Our objective is to complete the two processes and also to fulfill our commitments that have been made in the past … and we are confident that we’re going to achieve this.”
The first of the two deals is with the country’s private sector lenders—banks, pension funds, and hedge funds around the world that own 206 billion euros worth of Greek government debt. At the behest of the International Monetary Fund and the European Union, Greece must reach a deal with those private sector creditors, convincing them to accept only half the amount of money they are owed; a 50 percent “haircut,” a term used in the bond market when a borrower can’t pay back in full.
The IMF and the EU have imposed this condition in order for Greece to secure a second bailout of 130 billion euros worth of low-interest loans. These institutions, funded by tax payers, do not want to be Greece’s lender of last resort without first seeing the banks contribute to a reduction in Greece’s debt.
The talks between Greece and the private sector hit a snag on Friday when one of the negotiators, the Institute for International Finance, announced a “pause for reflection.”
But in his interview with CNBC, Papademos brushed off the delay, saying “over the past few weeks, substantial progress has been made towards reaching an agreement between creditors and Greece,” and that they are “close to an agreement.”
“But some further reflection is necessary on how to put all the elements together. So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.”
Papademos declined to say exactly what the hold up is. But several sources close to the deal tell CNBC that snag is related to how much interest Greece should pay on new debt it issues to replace old debt.
Thus far, the plan is to offer current bondholders 15 cents in cash equivalents and 35 cents in new debt for every 100 cents of debt they hold. The maturity on that new debt is likely to be 30 years.
Financial institutions wanted an interest rate of as high as 8 percent on the new debt. But the IMF and some members of the EU wanted it to be as low as 2 percent. The official sector’s rationale: The easier the repayment terms are for Greece, the less likely their taxpayer-funded institutions are on the hook for future money.
However, the dilemma Greece and Europe both face, is that if the offer is too low, very few bondholders will accept it, pushing Greece into a default after all.
If and when the deal with the private sector gets done—Greece must then come up with a 4-year economic plan that is acceptable to the IMF and the EU, in order to secure the 130 billion euros and fund its operations. That deal with the IMF and the EU must also get done before the March repayment deadline.
As for keeping the Euro as its main currency, Papademos says there is 100 percent political will to do all that takes to ensure it. “This is the position of this government and of all the parties that are supporting it, and what is more important, the overwhelming majority of the Greek people are in favor of Euro area membership.”
Very few doubt Greece’s desire to stick with the euro. What is likely to be far more contested by market participants is Papademos’ steadfast belief that staying with the euro actually helps Greece regain competitiveness, rather than hinders it.
Published: Monday, 16 Jan 2012