French banks have agreed to roll over holdings of maturing Greek bonds and German bankers have expressed interest in the French proposal. Business editor Dene Mackenzie reports that the Greek tragedy is far from over.
The Greek Parliament is today scheduled to start debating and voting on austerity measures and the major talks are due to finish on Saturday, New Zealand time.
By July 3, European ministers are expected to approve a fifth loan tranche to the troubled Mediterranean country, assuming Greece has approved the austerity and privatisation programme.
Early next month, the International Monetary Fund is due to approve a fifth loan tranche, but again, only if the austerity and privatisation programme is approved.
French banks, among the most exposed to the Greek debt crisis, have reached an outline agreement to roll over holdings of maturing Greek bonds, part of a wider European plan to avoid sovereign default.
Immediately after French President Nicolas Sarkozy announced the breakthrough, German bankers voiced their interest in the "French model".
The news came as international bankers met euro zone policymakers in Rome to discuss how the private sector can share the burden of a second rescue programme for Greece, Reuters reported.
Mr Sarkozy told a Paris news conference that French banks would be offered 30-year Greek bonds with a coupon equivalent to the euro zone's lending rate to Athens, plus a premium based on Greece's future economic growth rate.
European Union leaders agreed last week that extra public financing to help Greece avoid bankruptcy would depend on the voluntary involvement of private sector bondholders in a way that did not cause a "credit event" and that credit ratings agencies did not brand as a selective default.
Craigs Investment Partners private wealth research director Cameron Watson said Greece was insolvent. It had debts of $NZ607 billion, representing 160% of GDP.
The Government's budget deficit might hit 14% of GDP this year, unemployment was at least 16% and the Greek economy had shrunk nearly 7% in the past two years.
Germany, France and the United Kingdom were exposed to around $200 billion of the debt, either through private sector banks or at a government level. While the debt levels were "manageable", a default by Greece would put pressure on those banks, he said.
It would also raise interest rates for other marginal European economies such as Ireland and Portugal.
The issue facing Greece was more fundamental than a short-term crisis, Mr Watson said.
"Greece has lived beyond its means for a number of years, has borrowed too much to finance this spending and now does not have the earning power to pay back this debt.
"The solutions are obvious, but painful. Greece's current political leaders may need to draw on the words of their most famous son, Alexander the Great - 'Remember upon the conduct of each depends the fate of all' - as their conduct will indeed determine the fate of all," he said.
Investors might think that events in Greece should have little impact on New Zealand which is far away. However, Mr Watson said the New Zealand dollar weakened as investors retreated to the traditional safe haven of the United States dollar in the wake of growing risks in Greece.
A weaker New Zealand dollar, along with possibly higher interest rates in New Zealand, could be the most obvious outcomes of a worsening situation in Greece.
The Greek situation was a microcosm of the much broader issue of excessive debt that was overhanging most of the developed world, he said.
"This debt issue, we believe, is the most serious risk facing the global economy and investors."
Total debt levels - both private and public - in the US, Europe, Japan, Australia and New Zealand exceeded GDP, in some cases by an unsustainable level, Mr Watson said.
The high debt left economies vulnerable to any future shocks that might occur. A process of debt repayment, or deleveraging, was required to get those economies back on a sounder footing.
At the same time, economic policy-makers were also trying to stimulate higher economic growth through consumer spending.
"These dual objects are incompatible. You cannot have higher spending and deleveraging at the same time. We believe deleveraging will win out. Households and governments now have no option but to pay down debt."
Very soft credit growth and more fiscally realistic budgets are clear signs that the deleveraging process had begun.
The debt repayment implied lower consumer spending which, in turn, implied a period of below-average economic growth which might last for five years or more, Mr Watson said.
