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Greek $5 Billion Bond Sale Holds Off Default – For Now

Facing a deadline this month to pay a $3.82 billion loan payment or risk defaulting, Greece has again managed to escape, by selling $5 billion in 13-week treasury bills, mostly to Greek banks who had been recapitalized by the government. That meant that Greece had essentially borrowed from itself, taking out a loan to repay another loan.
That came as the government said the economy had shrunk by 6.2 percent, another sign the crisis is nearly out of control and that austerity measures demanded by international lenders have backfired.
Even more ominous was the news that 20 percent of Greeks have stopped paying their loans and credit cards to banks, with workers overwhelmed by pay cuts, tax hikes and slashed pensions and facing more of the same from a desperate government charged with making $14.16 billion in more cuts to keep bailouts coming. Bank analysts said the NPL’s, or Non-Performing Loans, may undermine the rescue loans and overwhelm attempts to resurrect the economy.
Most of the $5 billion from the sale of the T-bills will go to pay the next installment to the European Central Bank (ECB.) The remaining funds will go into the budget to help stop the bleeding of fiscal losses as tax revenues have fallen far short of expectations because the austerity measures have made Greeks nearly stop spending.
The Wall Street Journal reported that to make sure it doesn’t run out of money, the government also plans to draw on money from its bank recapitalization agency, the Hellenic Financial Stability Fund (HFSF), a Greek government official said. “It will be very tight, but we will be able to meet basic obligations like salaries and pensions,” the official said. “Money owed to the private sector, such as VAT (Value Added Tax) refunds, will be withheld until the next loan payment is in,” referring to a $38.8 billion installment, the last in a first series of $152 billion in rescue loans.
Greece is now refinancing more than 106 billion euros, or $130.64 billion, with so-called Emergency Liquidity Assistance (ELA,) representing one-sixth of its total assets, and paying interest penalties for it, akin to a consumer who keeps taking out more credit cards to repay other credit cards, creating a House of Cards that seems certain to collapse.
The NPL’s are equally troubling as they represent loans that are more than 90 days overdue and represent about $59.1 billion of the $295.7 billion in loans to Greek companies, bankers warned. That is more than twice the 9 percent of NPL’s in equally-troubled Spain, whose banks needed a $123.2 billion bailout from the European Union. The possible delay of VAT rebates, as indicated by the government official, may add to the nonperforming-loan problem, the Journal said, as VAT rebates play a vital role in the cash flow of small and medium-sized businesses.
All that bad news doesn’t even include the Greek bank continuing exposure to government debt. Greek banks, as other private investors, were forced to take 74 percent losses from a former government which was frantically trying to reduce Greek debt. At the end of June, Greek banks had about $19.7 billion in loans to the government, not including $308 million to political parties – including the ruling New Democracy, PASOK and Democratic Left coalition – which have made no attempt to repay them while banks are squeezing customers to repay all their loans despite big pay cuts and tax hikes imposed on the clients by the government.
The Greek banks also hold $29.56 billion in government bonds and bills that would, the Journal noted, be worthless and fall into default if the Troika shuts off the bailouts, leading to an almost certain collapse of the banking system and financial chaos. Greece’s pending second bailout of $173 billion from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) earmarked $61.6 billion for recapitalizing the country’s banks to keep the banking system alive, but the banks are now warning that it will still be too little if losses on private loans continue to grow. “It may not prove enough if the recessionary spiral doesn’t end soon,” another senior banker told the Journal.

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