Coverage: Greece seeks loan extension

The new government in Greece has caused many headlines as they cut austerity measures and the country creeps closer to default. Investors, traders, governments and basically everyone has been watching to see who would give-in first in the bailout negotiations. Greece can’t pay its debt, and that has the rest of the world rightfully worried.

The Wall Street Journal story by Gabriele Steinhauser, Viktoria Dendrinou and Nektaria Stamouli reported that Greece would ask for another rescue despite the recent rhetoric:

Greece will seek an extension to its rescue deal from the rest of the eurozone Wednesday, two officials with knowledge of the situation said, marking an apparent shift in the standoff between Athens and its creditors.

The extension of what the officials called Greece’s “loan agreement” could be for a period of four to six months, preventing the country’s current deal with the eurozone from expiring at the end of February and giving it time to negotiate a new bailout. The conditions attached to the request were still under negotiation, they said.

Although the request for an extension would mark a turnaround by the Greek government, it’s still unclear whether its creditors would accept it as a way out of the current impasse. After talks over how to keep Greece afloat broke down on Monday, eurozone finance ministers set several preconditions for considering an extension.

Those requirements include a promise from Greece to not roll back any budget cuts or economic overhauls implemented under the existing bailout deal and to coordinate any new legislation with its creditors. The ministers also want the new government in Athens to pledge that its debts to the eurozone would be repaid in full.

Liz Alderman wrote for The New York Times that Athens might have to agree to an extension in order to keep talks going:

As Prime Minister Alexis Tsipras stages a showdown with European creditors over a debt deal, he has insisted that a first step must be removing many of the austerity measures that previous governments agreed to starting in 2010 as conditions for bailout loans totaling 240 billion euros, or $274 billion.

But without many of the other economic changes that Mr. Tsipras and his finance minister, Yannis Varoufakis, say they intend but need time to make, removing austerity may not be nearly enough to restore economic stability — let alone stoke growth and create the new jobs that Greece desperately needs.

Whether the government can buy that time is the multibillion-euro question that now hangs over the ultimatum that European officials set on Monday in Brussels, insisting that Athens agree by the end of the week to continue honoring the current bailout rules while negotiations proceed or risk a cutoff of funds that could soon cause a default.

There were news reports late on Tuesday suggesting that Athens was poised to request an extension of its loan arrangements for six months. Whether that would include a pledge by Athens to abide by the kind of austerity demanded by the country’s European lenders was unclear.

There is no question that Greece is struggling to recover from the austerity cutbacks that its international creditors have demanded. To improve the national balance sheet, previous governments slashed state spending 20 percent in five years, mostly by cutting wages, pensions, health care and social services, which impoverished many Greeks and depressed consumption.

Herbert Lash wrote for Reuters that global markets were relieved that the emergency funds would continue to flow:

The euro rebounded on Tuesday and global equity markets recovered to trade near break-even on signs Greek banks will continue to get emergency funding despite a breakdown in debt talks between Athens and euro zone finance ministers.

Stocks on Wall Street pared early losses on news Greece said it intended to ask Wednesday for an extension of its loan agreement with the euro zone that would be apart from a full bailout programme, a source in Brussels said.

U.S. equities have been grinding higher lately, with major indexes notching a second week of solid gains last week and the S&P 500 setting a new closing high on Friday. Much of the advance came on signs of progress for a Greek debt deal and reduced tensions between Russia and Ukraine despite continued clashes in some areas.

Traders said the market was pricing in the prospect of a last-minute deal on Greece.

“The costs of a Greek exit (from the euro zone) are so great for Greece, they will eventually strike a deal. Yesterday’s meeting should not be seen as a failure, but more part of a necessary process,” said James Butterfill, global equity strategist at Coutts in London.

CNBC’s Catherine Boyle said this week could be critical for everyone involved in the debate:

On Wednesday, there is an European Central Bank (ECB) meeting at which Greek banks’ use of its emergency liquidity assistance (ELA) facility will be discussed – and after which the ECB may give more clarity as to when/whether it will put a cap on its funding for Greek banks.

This is important because, when you take away ELA as a backstop, there’s effectively no incentive to keep your money in a Greek bank unless you’re extremely patriotic. To avoid mass withdrawals, the Greek government may have to impose capital controls. “Then, the domestic politics gets ugly everywhere,” Guntram Wolff, director of Bruegel, the European think tank, told CNBC.

Varoufakis hasn’t really said clearly what he wants, other than more money, less conditions. At some point, the ECB will have to close the tab.”

By Friday, if Greece hasn’t asked to legally extend the current program (which would need to be approved by six national parliaments in the euro zone), the only option left is for the country to a request for a third bailout, according to Jeroen Dijsselbloem, who chairs the Eurogroup of the region’s finances ministers. This would mean being in hock to international creditors for even longer, and Varoufakis has said it’s not what the Greek people want.

It might not be what Greece wants, but the rest of the world is watching to see what happens and worried about a potential default. What’s clear is that if Greece does go bankrupt, it’s going to have repercussions that extend further than imagined.