ATHENS - Greece’s government warned yesterday that the debt-crippled country will have to ditch the euro if it fails to finalize the details of its second $169 billion international bailout, and that more austerity measures may need to be implemented.
A key component of the package, which was agreed upon last October, is that Greece has to persuade its creditors, such as banks and investment firms, to take a steep hit on the value of their holdings of Greek debt. Greece has the highest debt burden relative to the size of its economy in the whole of the 17-nation eurozone and the writedown will help lower it to more manageable, though still high, levels.
A spokesman, Pantelis Kapsis, said that negotiations in the next three or four months with international debt monitors will “determine everything,’’ including whether Greece escapes a disastrous bankruptcy.
Greece is being kept afloat by a first $142 billion international bailout agreed in May 2010, after investors, shocked by the country’s budget deficit and debt mountain, demanded sky-high interest rates to continue buying Greek bonds. Another package was agreed upon in October, after it became clear that the first package would not suffice, but that deal has yet to be finalized.
Sorting out the details of the bailout is the main task of the coalition government headed by Lucas Papademos, a former central banker whose short mandate is expected to expire in early April. “This famous loan agreement must be signed, otherwise we are outside the markets, out of the euro, and things will become much worse,’’ Kapsis told private Skai TV.
In return for its first batch of rescue loans, Greece had to adopt deeply resented austerity measures to contain its budget deficit - set to hit at least 9 percent of GDP for 2011 despite repeated spending cuts and tax hikes.
Kapsis said further cutbacks, possibly including new taxes, might be required.
While representatives of banks and insurance funds that hold a lot of Greek debt tentatively agreed in October to cut the face value of their holdings of Greek bonds by 50 percent, they have so far failed to agree on crucial details of the deal.
Those include how much interest Greece has to pay for the lower-value bonds and when they have to be repaid - aspects that are key to determining how much of a relief the debt restructuring will actually bring.