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Forget about preventing default in Greece, control it, says Europe

Though Athens is still taking steps to contain the damage, most of Europe is skeptical that Greece will dodge a default. 

By Correspondent / February 17, 2012

Youths take part in an anti-austerity rally in front of the parliament in Athens, Friday, Feb. 17, 2012. Greece appears to be closing in on a new international rescue package despite unresolved doubts among eurozone partners about how fast it will manage to bring its debt down.

John Kolesidis/Reuters

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Berlin

Greece’s European partners are increasingly skeptical that Athens can avoid default. The highly indebted country is working feverishly to secure a debt write-off to avoid default, but international investors see even that as a default of sorts.

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With only weeks to go before a crucial bond repayment date, statements from European leaders reveal a growing mistrust in the Greek political class's ability and willingness to implement deficit cutting measures. Without those measures, Greece will not receive a necessary second bailout from international lenders, and without the bailout, it will likely default when its debt comes due in March. 

According to some analysts, Europe is readying for a Greek bankruptcy. 

“Some of the core economies in the eurozone are taking a much tougher stance on Greece now and seem to be prepared to allow it to default,” says Ben May, European economist at the London-based research consultancy Capital Economics. “Add to that the number of stumbling blocks remaining and there is a real chance Greece could default in March.”

A meeting of eurozone finance ministers scheduled for yesterday, expected to give the go-ahead for Greece’s second bailout in as many years, was cancelled because the government in Athens had not fulfilled a number of conditions imposed by the international creditors, the European Union, and the International Monetary Fund, according to the leader of the Eurogroup, Luxembourg’s Prime Minister Jean-Claude Juncker.

Even after agreeing on a tough austerity package that included €3.3 billion ($4.3 billion) in budget cuts and sparked violent protests throughout the country over the weekend, Greece still had to identify another €325 million ($423 million) in budget cuts. Leaders of the two main parties in the government coalition, George Papandreou of the center-left PASOK and Antonis Samaras of the conservative New Democracy Party, had to give written pledges confirming that they would honor the conditions of the bailout should they win general elections later this year. 

Apparently that has happened now, and a meeting of finance ministers on Feb. 20 is expected to make “all necessary arrangements to release funds” Greece so desperately needs before it has to repay €14.5 billion ($18.9 billion) on March 20, Mr. Juncker said.

'A bottomless pit'

But some of his colleagues are still not convinced.

"When you look at the internal political discussions in Greece and the opinion polls, then you have to ask who will really guarantee after the elections [...] that Greece will stand by what we are now agreeing," German Finance Minister Wolfgang Schäuble told SWR2 radio. “We can help, but we can’t pour money into a bottomless pit.”

The relative calm financial markets have displayed in the face of the growing likelihood of a default seems to hint at a certain level of preparedness among investors. Banks had two years time to reduce their exposure to Greek debt and to boost their capital ratios, thus limiting the damage they would suffer in the case of a Greek default and making markets less volatile. 

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