Obama: Greece default would be ‘disastrous’
By Howard Schneider and and Scott Wilson,
President Obama said Tuesday that Greece’s economic problems posed a potentially “disastrous” risk to the world economy. And he urged German Chancellor Angela Merkel to push for a resolution of the crisis over the Mediterranean nation’s finances.
Despite getting a $161 billion international bailout last year, Greece is again nearing default. The nation may run out of money to pay workers, pensioners and creditors this summer if it does not receive more help from the International Monetary Fund and its European neighbors.
Negotiations over additional help, however, are hung on Merkel’s insistence that private bondholders share some of the cost — an idea resisted by the IMF, the European Central Bank and others who feel it would undermine confidence in other European countries.
At a joint appearance with Merkel, Obama did not explicitly call on her to drop her conditions and speed approval of a new package for Greece.
But he made clear that the United States views the risks as serious, and he put the onus on Merkel and other European powers to quickly find a solution.
“We think that America’s economic growth depends on a sensible resolution of this issue. We think it would be disastrous for us to see an uncontrolled spiral and default in Europe, because that could trigger a whole range of other events,” Obama said.
A Greek default could undermine the health of the banks and other institutions that hold the country’s bonds — including some of Europe’s most important financial institutions and the European Central Bank itself. It could also trigger crises in other heavily indebted European nations by raising doubts about the stability of the 17-nation union that uses the euro.
At the news conference, Merkel said she understood the risks of default but did not directly address her push for private bondholders take on some of the cost of helping Greece. “It is in each and every country’s interest to see that this common currency [the euro] is not in danger,” she said. “We will act in such a way that sustainability is guaranteed.”
The IMF, the ECB and the European Union have tentatively agreed to extend more aid to Greece. But that program hinges on the Greek parliament’s willingness to impose a new round of austerity on a population already reeling from high unemployment, a deeper than expected recession, and a year of cuts to social programs and public payrolls.
Officials and analysts have expressed concern that Prime Minister George Papandreou may not have the political command of his governing socialist party to push the new cuts through amid growing socialist and conservative party opposition. The austerity plan is due to be introduced this week.
Meanwhile, European politicians and financial officials are jockeying over the terms of any new bailout, which may require a commitment of as much as $100 billion from the IMF and European nations.
The IMF’s top official in Greece said on Tuesday that the “mixed messages” coming from European politicians were undermining the credibility of efforts to rescue Greece, while talk of imposing cuts on private bondholders was driving away possible investors.
That contrasted with comments that French Finance Minister Christine Lagarde, the favorite to fill the vacant post of IMF managing director, made in India on Tuesday, where she indicated that private investors would be asked to contribute to Greece’s rescue.
Investors and analysts are concerned that, unless carefully crafted, including private bondholders in the new Greece deal could be interpreted as a default and touch off the sort of unpredictable market reaction that Obama and others are worried about.
European officials are discussing a “voluntary” appeal to bondholders to accept long-term securities in return for ones that are coming due in the next 18 months, a swap that could decrease by tens of billions of dollars the amount of money Greece needs in coming months.
“The point is really whether you can find conditions under which bondholders would be willing to exchange that debt for something with a longer maturity without there being coercion,” said Jens Larsen, chief European economist for RBC Capital Markets. “If you do it by saying ‘take these bonds’ and make the old stock unusable, then that may sound clever but it is almost certainly perceived as coercion.”