Greece Wants A Better Deal

Greece wants a better deal on the rate it pays for its sovereign debt. “A discussion has begun on the cost of the loans and that is very important for us, so that we can have lower interest rates,” Finance Minister George Papaconstantinou told private Mega television, the AP reports

It is hard to reconcile the request with the market’s belief that Greece has no choice other than to default on its bonds and force holders of its paper to take pennies on the dollar. The cost to insure Greek debt remains stubbornly high, so the best minds among global capital markets investors believe that the problems with the little European nation’s obligations will not go away. That risk should carry a heavy premium.

The Greek request is irrational from a financial viewpoint. That does not mean its neighbors, particularly France and Germany, won’t eventually go along with a plan. Their incentive to agree to the Greek request is simple. The Greek economy is still weak. High interest rates on its debt are unfordable. They are so high that they make a default more likely.

The request by Greece is likely to be followed by more agitation from Ireland to restructure its obligations so that its interest costs will drop. A bailout of Portugal would be followed by similar requests. One of the risks of contagion is that rescue packages may have to be done at below market interest rates to help ensure that the rescues actually work.

Germany has the power to disregard requests from Greece and kill prospects of a renegotiation. Its contributions to a restructuring would have to be large because of its GDP in relationship to the balance of the EU. Many German politicians believe that any retreat on the matter of what Greece has to pay for past sins will simply make it more likely that those sins will be repeated.

A request for lower interest rates by Greece will almost certainly be rejected because large eurozone members want to see the country cut its government expenditures further and raise taxes again to close its budget gap more rapidly. The gamble is that such actions will work enough that sovereign debt purchasers will  eventually view Greek paper as less risky than it is today. But, there is a strong argument that Greece could still go under financially. Germany still has to deal with that possibility and gamble that the fallout will not hurt it much.

Douglas A. McIntyre