Greek ‘Hard Default’ on Debt Obligations Isn’t Anticipated, Dallara Says
“Do we anticipate a hard default for Greece? Not at all,” Dallara told reporters at a news conference in Washington.
European politics and a worsening Greek economy are posing obstacles to the debt deal agreed in July, Dallara said. These hurdles are not “insurmountable” and the Washington-based banking group remains confident that the deal will go forward, he said.
Euro-area governments pledged 109 billion euros ($152.4 billion) in public money for Greece on July 21, accompanied by 50 billion euros through an IIF-coordinated private-sector debt swap and bond buyback program. Since then, the deal has been bogged down by Finland’s demands for extra security as a condition of participating in the deal.
The International Monetary Fund, which is also in line to provide funding to Greece, has opposed the use of collateral because it could deprive the IMF of its priority creditor status. Negotiations continue today with a meeting of the Finnish, Dutch and German finance ministers in Berlin.
Dallara said preliminary discussions with investors have been “quite encouraging” and that it’s too soon to say whether the deal will meet its participation target of 90 percent of eligible bonds. So far, the plan has commitments from 40 institutions holding about 70 billion euros in Greek government debt, or about 50 percent of the eligible total.
“There is now an initial exchange of information -- it is not a formal road show -- being held with European regulators and investors who hold Greek debt and then there will be a formal offer,” Dallara said. He said it will take “some weeks” to gauge the level of investor support.
Overall, investors are anxious about sovereign debt levels and whether governments are taking enough action to rein in spending, Dallara said. He took issue with IMF chief Christine Lagarde’s Aug. 27 comments that European banks should be forced to add “substantial” amounts of capital to prevent the debt crisis from infecting more countries.
European banks are generally not undercapitalized and only a “small handful of small to medium-sized institutions” would benefit from such a move, Dallara said. He called for broader efforts to ease the debt-related “anxieties” in the U.S. and Europe.
“There is an urgent need for markets to be reassured regarding the trajectory of fiscal reform in Europe,” Dallara said. In the case of Greece, “we see a government there that is committed to sustain the economic reform agenda going forward.”