The negotiations surrounding Greece's debt problems took a
step further on Thursday with the new Greek government formally
applying for a six-month extension of its loan and a renegotiation of
some its terms.
After speculation that it was on the cards, the
confirmation came at just after 9 a.m. GMT with a request to prolong its
"master financial assistance facility agreement."
The terms will also differ from Athens' current bailout program with Greece's new government - headed by the left-leaning Syriza Party - hoping to overhaul the nation's bailout program with European Institutions and alleviate its debt burden.
Syriza's pre-election mandate was to try to reduce the austerity policies imposed by Greece's creditors as part of the bailout loans. The current program - which included the European Union and the International Monetary Fund as creditors - was due to expire in little more than a week.
While there was little detail about the proposed
new loan agreement, it was still seen as progress by markets with European bourses turning higher after the news.
After speculation that it was on the cards, the
confirmation came at just after 9 a.m. GMT with a request to prolong its
"master financial assistance facility agreement." The terms will also differ from Athens' current bailout program with Greece's new government - headed by the left-leaning Syriza Party - hoping to overhaul the nation's bailout program with European Institutions and alleviate its debt burden.
Syriza's pre-election mandate was to try to reduce the austerity policies imposed by Greece's creditors as part of the bailout loans. The current program - which included the European Union and the International Monetary Fund as creditors - was due to expire in little more than a week.
While there was little detail about the proposed
new loan agreement, it was still seen as progress by markets with European bourses turning higher after the news.
'Face the truth'
Meanwhile overnight, facing the prospect of Greece's banks
running out of cash, the country has been allowed more provisions via a
Emergency Liquidity Assistance (ELA) from the European Central Bank.
This differs from its main bailout program and doesn't include the
tough austerity policies which Greece policymakers are trying to
negotiate over.
The situation has become so heated in recent weeks that some prominent economists now believe that the time is right for Greece to leave the euro zone bloc. Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research believes Greece's creditors need to "face the truth" and realize the country is bankrupt and needs to undergo a devaluation in order to regain competitiveness.
"Going to the drachma is the only possibility I believe, because then the economy will be revitalized rather quickly," Sinn, the widely-respected economist, told CNBC Thursday.
"We have to accept that as creditors and face the truth and reduce the burden to the Greek people," he added.
He argued that the drachma – its currency before it adopted the euro -- would help stimulate the country's economy. For example, Greece would stop importing agricultural products from other euro zone countries if it was using the drachma, as they would be more expensive, Sinn said.
"The people will go to their farmers and buy the products there, so there will be more jobs there," he added. "Second, tourists will come back from Turkey and go to Greece."
He also said that Greek people who have transferred money abroad because of fears of capital controls would be more willing to bring it back to the country and buy cheaper real estate. This would lead to a construction boom and potentially a fillip for manufacturing too, he added.
The situation has become so heated in recent weeks that some prominent economists now believe that the time is right for Greece to leave the euro zone bloc. Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research believes Greece's creditors need to "face the truth" and realize the country is bankrupt and needs to undergo a devaluation in order to regain competitiveness.
"Going to the drachma is the only possibility I believe, because then the economy will be revitalized rather quickly," Sinn, the widely-respected economist, told CNBC Thursday.
"We have to accept that as creditors and face the truth and reduce the burden to the Greek people," he added.
He argued that the drachma – its currency before it adopted the euro -- would help stimulate the country's economy. For example, Greece would stop importing agricultural products from other euro zone countries if it was using the drachma, as they would be more expensive, Sinn said.
"The people will go to their farmers and buy the products there, so there will be more jobs there," he added. "Second, tourists will come back from Turkey and go to Greece."
He also said that Greek people who have transferred money abroad because of fears of capital controls would be more willing to bring it back to the country and buy cheaper real estate. This would lead to a construction boom and potentially a fillip for manufacturing too, he added.
Capital controls?
Greece's situation got even more complicated Thursday morning, with a report in Germany's Frankfurter Allgemeine Zeitung
(FAZ) newspaper, citing sources, which said that the European Central
Bank would feel more comfortable if Greece introduced capital controls
to stem the outflow of deposits from the country's banks.
Understandably, markets traded lower in early deals Thursday with this
uncertainty.
A spokesperson for the central bank told CNBC, however, that there was no discussion on capital controls by the ECB's governing council.
Sinn is an advocate of such controls and believes that the policy would mean the region would not repeat the mistakes of Cyprus in 2013. He also explained to CNBC that he wasn't convinced by the ELA to Greece's banks, saying that Greece's central bank or its government isn't liable to replenish its lenders because it didn't have the resources. Instead, the liability was still on other euro zone creditors, he said.
A spokesperson for the central bank told CNBC, however, that there was no discussion on capital controls by the ECB's governing council.
Sinn is an advocate of such controls and believes that the policy would mean the region would not repeat the mistakes of Cyprus in 2013. He also explained to CNBC that he wasn't convinced by the ELA to Greece's banks, saying that Greece's central bank or its government isn't liable to replenish its lenders because it didn't have the resources. Instead, the liability was still on other euro zone creditors, he said.
Slippery slope?
He also highlighted that he wasn't overly concerned that a Greek exit from the euro zone
would lead to other struggling nations heading for the doors. The
Podemos Party in Spain has been vocal since the Greek elections in
January but Sinn argued that it wouldn't be a slippery slope for the
euro zone.
Instead he flipped the idea around, saying that conceding major alterations to Greece's bailout program would be more disadvantageous to political sentiment in Spain than just letting Greece go it alone and introducing the drachma again.
Bob Parker, senior investment, strategy and research advisor at Credit Suisse, told CNBC Thursday that the level of brinkmanship in the region was "quite extraordinary"
"I really have to question whether actually people realize the downside risk if there is a Greek exit. What would be the write-offs, for example, at the European Central Bank?," he said.
Instead he flipped the idea around, saying that conceding major alterations to Greece's bailout program would be more disadvantageous to political sentiment in Spain than just letting Greece go it alone and introducing the drachma again.
Bob Parker, senior investment, strategy and research advisor at Credit Suisse, told CNBC Thursday that the level of brinkmanship in the region was "quite extraordinary"
"I really have to question whether actually people realize the downside risk if there is a Greek exit. What would be the write-offs, for example, at the European Central Bank?," he said.
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