By Jack Duffy

PARIS (MNI) – The second Greek bailout approved this week may mark
a turning point out of the debt crisis as some European leaders claim,
but signals from financial markets still point to trouble ahead.

The yield on the new 30-year Greek bond issued as part of the
private sector debt swap was quoted at 14.7% on Friday, up 130 basis
points from Monday. The new Greek 11-year bond yielded around 18.2%.

Although its debt stock has been cut by more than E100 billion and
its interest payments lowered substantially, few analysts or investors
believe that Greece’s debt load, even if it reaches the targeted 120% of
GDP, is sustainable.

“We think the pricing [of the new bonds] is correct, given the
risks,” said Ioannis Sokos, an analyst at BNP Paribas in London.

The troika — comprised of the EU Commission, the IMF and the
European Central Bank — detailed some of those risks in a report, “The
Second Economic Adjustment Programme for Greece,” issued in conjunction
with the bailout.

The report notes, for example, that the Greek government will have
to identify spending cuts equal to 5.5% of GDP, or around E11 billion,
in the next few months if it hopes to hit budget targets calling for a
primary surplus of at least 1.8% of GDP in 2013 and 4.5% 2014.

“The determination of the Greek authorities to stick to the agreed
policies will be tested already in the coming months when the
deficit-reducing measures to close the large gap for 2013-14 need to be
identified,” the report said.

Athens will face this new wave of austerity as it enters yet
another year of deep recession. Greece’s GDP is expected to contract by
4.75% this year after a 6.9% plunge in 2011. “The recovery previously
announced for next year will be further delayed with, at best, a
stagnation of activity in 2013,” the report noted.

Greek voters, meanwhile, will go to the polls in late April or
early May amid indications that disaffection with austerity is mounting.
Surveys show that voters are abandoning the two main parties, Pasok and
New Democracy, suggesting that the next government could be a
multi-party coalition including radical groups that have not signed on
to the bailout.

But perhaps the biggest risk identified by the troika report is one
caused in part by the PSI itself — that Greece won’t be able to fund
itself in the markets when the bailout ends in 2015. By targeting
private-sector investors, the PSI left as much as three-quarters of
Greek debt in the hands of official lenders or other senior creditors.
Enticing private investors back into a market overwhelmingly dominated
by senior creditors will be difficult, the troika acknowledges.

“The high level and share of official debt, as well as the de
facto senior status of the bonds resulting from…the debt
restructuring, complicate Greece’s return to the markets at the end of
the second programme,” the report said. “Should market access not be
restored at the time of the expiration of the programme, additional
official sector financing could become necessary.”

Another bailout in other words.

A third bailout would present Greece’s official creditors with some
stark choices. Without sufficient private-sector debt to undertake a
PSI-2, official lenders might have to do the unthinkable: take haircuts
or even forgive Greek loans entirely in order to make Athens’ debt load
sustainable.

“You cannot think of a second debt restructuring in Greece without
the official sector taking part,” said Sokos, the BNP Paribas analyst.

Far from being a convincing end to the Eurozone debt crisis,
Greece’s second bailout looks more like a high-wire act without a net.

As IMF Managing Director Christine Lagarde said Thursday, “risks to
the program remain exceptionally high, and there is no room for
slippages.”

**(EuroView is an occasional column written by Market News
International editorial staff. Any views expressed are solely those of
the writer)

–Paris newsroom, +33142715540; jduffy@marketnews.com

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