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http://www.fxstreet.com/fundamental/market-view/european-crisis/2012/02/09/03/

Greece fresh bailout: Not all done and dusted just yet
Thu, Feb 9 2012, 22:05 GMT

by Ivan Delgado Egea - FXstreet.com | View company's

After the Greek coalition government reached common ground on pension cut reforms, last sticking point, disbelief over the effectiveness of the new Greek austerity plan keeps the Eurogroup reluctant to sign off on a fresh second bailout worth €130 bln. Despite the most painful austerity measures Greeks will witness on their life-time, Eurozone ministers have cast doubt over the plans.

German FinMin Schaeuble stated plainly "Greece must first implement parts of the first program before we decide upon a second bailout. We still don't have the conditions required by the EU council. I'm confident the timetable can be met. It's all down to Greece, (but) these are not simple decisions. I don't think we'll come to any results tonight." The negotiations have made progress but we're not there yet."

"The key seems to lie in the sustainability of Greece's finances going forward . We need a comprehensive package that caps Greece's debt at 120% of gross domestic product by 2020, and the upper limit of what Europe can afford is set at EUR100 billion plus EUR30 billion in sweeteners for the bond exchange. These conditions haven't yet been met" Schaeuble added.

"What this means for the three Greek coalition partners isn't clear, they've committed to future cuts but is that in anticipation that the situation they're in is considered "ground zero" or is it on the assumption that they've received a passing grade and the new commitments are all that are required" the IFR Markets team argues.

Speaking at a press conference after the end of the Eurogroup meeting, Venizelos said it was “unfortunate that the Eurogroup did not take a decision on the second [bailout] loan, which is linked with the successful conclusion of the [private sector debt swap] program.”

He added: “The Eurogroup did not take any decision today because there were objections from many countries that we did not fully conclude the fiscal consolidation program with the troika, since E325 million worth of spending cuts is still missing.”

In the PSI negotiations domain, they have to be concluded by Feb 13 if the Mar 20 bond payment is to be made, but that is contingent on the troika signing off the aid package.

Another cracked appeared when the Greek Deputy Labour Minister Yiannis Koutsoukos resigned in protest over the latest cutbacks and reforms. Greek labor unions have scheduled another 48 hour strike starting Friday to protest against the austerity measures. Amid this dire scenario, lawmakers are preparing to vote on the new austerity measures over the weekend and an "implementation law" is supposed to be considered in the next 10-15 days, according to local sources.

Kathy Lien, Director of Currency Research for GFT comments: “If everything goes smoothly, Greece will receive bailout funds just in time to avoid default. Before getting too excited however, its important to remember that there are still a few hurdles to clear before the funds can be released. The Greek and German Parliaments have to vote on the full package - but we expect the votes go smoothly because it would be a major embarrassment and setback for everyone if the plan was rejected.”

EUR/USD fell way short from impressing the market and managed to take only a few stabs to the 1.3300 area before knocked back down, as investors realize there is still no assurance over a second bailout to Greece unless implementation of the new austerity programs; at best, a second bailout may get politicians only a few more months to sit on their bums thinking another stone is off the way till the next crack coming from Greece or another peripheral contry occurs.

ECB expands 3-year LTRO eligibility criteria

Apart from the news coming from Greece the market moving event of the day was definitely the ECB rate decision and Mario Draghi's press conference held after the rate announcement. The ECB Governing Council decided to keep the main interest rate unchanged at 1.0% for the second consecutive month. During the subsequent press conference the ECB head Mario Draghi commented on the considerations underlying the decision.

The president suggested that inflation will stay above 2% for several months and then it will decrease below this level, while the pace of monetary expansion remains subdued.

He emphasized the need to keep interest rates low in order to support Eurozone economy and assured that tentative signs of stabilization at low levels are already visible, which means that we should witness very gradual recovery throughout 2012.

Various factors contribute to the deceleration of growth, such as weak consumer confidence or subdued global demand. Recovery should be supported by an increase in global demand as well as low interest rates and other central bank measures.

Mario Draghi also said that the ECB will continue supporting the financial sector with unconventional measures, reminding that they are temporary in nature. He announced that collateral will be expanded in order to make 3-year loans available to small and mid-sized banks.

Finally, he urged the EU Member States to carry on with structural reforms in order to stimulate competitiveness and employment and reduce deficits. He said that it is of crucial importance that EU countries fully implement the 2012 fiscal rules.

During the Q&A part of the press conference ECB president refused to comment on how holdings Greek bonds will be treated.

Troika draft - Greece faces hard cuts

On Wednesday night, after three days of delays, Greek coalition leaders had agreed on a draft deal on austerity measures demanded by the Troika (Monetary Fund, European Union, and European Central Bank) to secure a €130 billion bailout. According to the first copy obtained by Bloomberg, the draft says Greek economy will shrink as much as 5% in 2012 and sees return to growth in 2013.

In the Troika draft, Greece's government pledges to cut by 20% the minimum wage while it renews its vow to cut 150,000 jobs through 2015 and 15,000 state job cuts in 2012 while pledges 5 fires for every new higher.

Here the highlights of the draft:

Greece's 2012 GDP will shrink by as much as 5%. The country is expected to return to growth in 2013.

Greece pledges to cut 15,000 in state jobs in 2012, 150,000 until 2012

Minimum wage will be cut by 20 percent.

Pledges not to increase VAT

The government will cut medicine spending will fall from 1.9% to 1.5%

Greece will also sell stakes in six companies. In particular, energy companies and refineries.

On Thursday, a series of meetings will make this agreement finally possible, Greece Cabinet is expected to meet in the morning, the Eurogroup is scheduled to gather at 17GMT. Commerzbank analysts observed that the market might not be pricing the fact that even if the Greek deals are pushed through, they still have to pass under parliament vote, which will likely be a tough apple.

As commented by Chris Walker, FX analyst at UBS: "The Greek negotiations appear to be moving into the final stages as Eurogroup chairman Jean-Claude Juncker announced that a press conference is scheduled for 18.00CET on Thursday. The ECB's involvement in the debt swap remains a crucial element in the process."