Greek Debt Deal Likely, But Risky

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Greek Debt Deal Likely, But Risky

Post by Admin on Wed Jul 15, 2015 5:14 pm

Maria Bartiromo
Special for USA TODAY

U.S. investor Ross says fixing all that ails Greece won't be easy

The clock is ticking on Greece, as lawmakers there await a response from European creditors this Sunday on Greece's final attempt for a restructuring of its $300 billion debt. The results will determine whether Greece can pay its bills, agree to follow new European austerity measures and stay as a member of the eurozone or leave the eurozone and return to its drachma currency. I caught up with billionaire investor Wilbur Ross, who owns a stake in Eurobond, one of Europe's largest banks. Our interview follows, edited for clarity and length.

Q: We are down to the wire. The Greek people last week held a referendum, where the Greek people voted no to staying in the eurozone. And yet they are still negotiating to stay in. Where does this stand going into this important Sunday meeting?


A: This week started out very badly with the events of Sunday. I was afraid that the "no" vote would eventually lead to the exit of Greece. But then the finance minister, who was the real hardliner in the negotiations, was pushed out. And the prime minister sent another bail-out proposal. Everybody knew that Greece needed an infusion of cash, both to make up for the IMF default that already occurred on the first of July, and an upcoming more dangerous one that would occur on the 20th of July, which is something like three and a half-billion (dollars) to the European Central Bank.
The second thing is that there's still money in the stabilization fund that had been meant to go to the Greek banks, and they could make that available. So, they do have liquidity available within the institutions to provide that. The good news is I do not think we are talking about a full forgiveness of debt. That was going to be a very tough thing for the lenders to take right now, because the combination of having to write a new check and write down the old debts immediately would be a heavy burden. Longer term, everybody knows something's going to have to be done to compromise the Greek debt. But my guess is the way it will be done is to postpone the deadlines, cut the interest rate even further and therefore effectively reduce the burden of it, but probably not change the theoretical principal amount. The interest rate on it now is something like 2.5%, so if you cut it to 1% and you extended the maturities 20 or 30 years, after a while it gets to the point where the debt burden isn't so bad.
And the maturity schedule, once we get over this period now through August, is very light the next few years anyway. It's not 'til around 2019 or '20 that you have some more maturities. So, they do have to get over this hurdle.

Q: So you do think then that we will get a deal on Sunday that includes a restructuring of debt and some of these big issues that the eurozone leaders wanted, like a restructuring of the pensions, like higher taxes?

A: Yes, they already have indicated that the Greek side will make specific proposals relating to ta reform and to the pensions. Of the two, the harder one for the Greeks is the pensions. The tax reform they have been wanting to do anyway. They'll probably skew it very much toward the high-end earners. The hard part's going to be how real and meaningful are the reforms to the pensions because the pension payments are 18% of the Greek economy. And that compares with 7% in Ireland and 5% in the U.S. So, it's totally out of whack, and it's the monster that has to be fixed. My guess would be some sort of gradual increase in the retirement age, 'cause that would be less immediately painful.

Q: But do you think they're going to be able to stick to some of this stuff? I mean, when you think about the fact that the mentality of the Greek people and the Greek leadership is such that they don't really want to make these changes.

A: The problem in Greece is they haven't even been trying. I mean, that whole business about the swimming pools was ridiculous. People claimed they'd raise taxes in part on haw many swimming pools people had. So people claimed there were only 300 swimming pools. Eventually, they send a drone or something and found there were 22,000 pools. In reality, they would've known right along there were a lot of people skimming, but they didn't do anything about it. And as far as I can tell, they haven't done much to enforce tax payments. So tax reform especially in the sense of making it more progressive, should not be very controversial with the Greek people.

Q: You have invested there, acquiring Bank of Cyprus, in vesting in Eurobank. The ATMs are running out of money, and you had a limit in terms of how much money you can take out of an ATM. What can you tell us about the banks today?

A: Bank of Cyprus is not really affected. They sold their branches in Greece as part of the restructuring of Cyprus. Investors in Eurobond have been affected, which is one of the four main banks. There are four banks in Greece that have a little bit over 80% of all the deposits, and Eurobank is one of them.
There's no liquidity at all. There's nobody making loans. There's nobody extending credit, and it isn't even just the banks. Businesses aren't extending credit to each other. Farmers aren't willing to put their chickens on the truck to go to market unless the truck driver gives them the cash in advance. The most severe part of it is Greece has to import a lot of its food and a lot of its pharmaceuticals, and they're not getting any international credit.. So you're starting to have literally shortages of food. The liquidity situation is terrible, and that really has to be fixed right away. Now if they have a deal, it'll be very easy to fix it, because even with the European Central Bank reducing the collateral values of the assets held by the banks, they still have plenty of room if the ECB would lift their 89 billion euro total cap on the emergency liquidity assistance to the Greek banks. So they could turn that spigot on in a very few minutes.

Q: But how long will it take to right this ship? Tell me what life looks like next week, the next couple of weeks and in the next several months and years in Greece if, in fact, hypothetically speaking, we get an agreement that they stay in the euro on Sunday.

A: It will take a matter of months because there has been severe damage done to the economy. There's no question about that, and it's probably gonna be hard getting money back into circulation. There's a lot of money that's left the Greek banks that's now in banks elsewhere in Europe or is in a mattress somewhere. It's gonna take people a little while before they become confident that they're not going to be fooled and their country suddenly go to the drachma, because everybody knows if they went to the drachma, it would trade at 25 or 50 euro cents per unit, a huge devaluation from the current euro. The trickier question is will Prime Minister Alexis Tsipras be able to play this as a victory. I think he'll be able to say that he didn't yield to all of the demands, he is going to get some concession on their big debt, and he's gotten liquidity pumped into the country. So in retrospect, it may very well be the no vote was all about him showing he is the toughest kid on the block and therefore buying the support of the public when he puts in the more draconian measures they're all going to hate.

Q: Do you think the people of Greece understood what they were voting no to?

A: No, they did not. I think they really viewed it as Mr. Tsipras vs. German Chancellor Angela Merkel. There's this tremendous antipathy on the part of the Greeks for the Germans because the Germans treated them very harshly during World War II. And so there's a longstanding hatred between them. It just became inflamed during these discussions. And frankly, I think (former Greek finance minister) Yanis Varoufakis fanned that fire to a very big degree.

Q: Do you see an impact of all of this to the U.S.?

A: Yes, once again here's a big international crisis from which the U.S. did nothing but a little bit of jawboning. And every time that there's another international crisis and we're a non-player, a non-functional member, I think our role in the whole global power ecosystem goes down. It's yet another instance of that happening. We just seem to have nobody home when it comes to dealing with the problems that come up.
Another thing that I don't know if Americans realize is that Greece is of very big geopolitical significance to Europe and, frankly, to the U.S. The British have their largest airbase in the world on Cyprus.
And if the Greek issues got too bad and if it somehow infected Cyprus, it could create a problem there. Also the Syria part of Greece is basically Communist in its orientation. And Greece and Russia have always had a fairly friendly relationship.
There's a big danger if Greece had gone down the drain that it would become too unified with Russia, and that would create all sorts of problems on the geopolitical basis. So there was not much of the U.S. economy that was at risk, but there was a huge geopolitical risk in this.
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