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Can Greek tragedy be rewritten?

Demonstrators confront riot police near the Greek parliament in Athens, 15 June 2011
Image caption Anti-austerity protests in Athens are getting more heated

The indignant crowds occupying the Syntagma central square in Athens are not the only people desperate for a new solution to their very own Greek tragedy of looming insolvency.

Some 1,300 or so miles away, finance ministers in Greece's European partner countries still seem some way off agreeing a plan to put before the full EU Summit at the end of next week on 24 June.

And if they don't come up with a workable solution, the bond and financial markets will be merciless.

Greece is in the process of receiving the 110bn euros of loans agreed in May last year from the full EU, the eurozone member countries and the IMF. But it needs more.

The extra lifeline would cover a funding gap of 30bn euros in 2012. Over three years, the likely shortfall is put at 90bn euros.

It all has to be resolved as soon as possible, because the IMF will not deliver the next 12bn-euro tranche of existing programme cash until a convincing plan is in place to show how that full 30bn-euro gap is to be plugged.

The talk is of a further 45bn euros to come from the EU and the IMF, plus 30bn euros more of asset sales in Greece.

Changing the profile

Then comes the even more difficult bit to agree on. Germany wants bondholders to provide a further 30bn euros of relief by getting Athens' lenders to swap their bonds for new ones with extended, seven-year maturities.

That would give Greece more time to reform its economy - although it wouldn't wipe out any of the debt obligations.

Politicos in Brussels like to call this "reprofiling" of loans. But the credit agencies would construe this as a pure and simple default.

There is a possible alternative on the table. The European Central Bank, France and the European Commission have been promoting a potentially less traumatic kind of debt swap - a procedure known as the "Vienna initiative".

This takes its cue from an arrangement which helped contain the debt crisis in Eastern Europe two years ago. Lenders publicly pledged to roll over their funding without any formal default or restructuring of debt. But nobody knows whether the approach could be made to work for Greece.

The ECB warns that anything seen by the markets as a default could cause rapidly spreading panic, of the kind seen after the 2008 collapse of Lehman Brothers in the US.

But some are encouraged that the European partners are talking about moves to give Greece more time to pay - or to have some of its debts written off entirely.

Strong-arm tactics?

The focus is also moving on whether bondholders might be persuaded to change the terms of their loans or would have their arms twisted.

Questioned in the European Parliament, the president designate of the ECB, Mario Draghi, held the bank's line on this, saying that he still did not understand whether bondholders would have any choice in whether they gave concessions to their borrowers.

"There are basically two initiatives that are under discussion," he told MEPs. "One is the Vienna initiative, which looks to me entirely voluntary. Another one is a debt exchange, which I haven't understood whether it is voluntary or it could end up being involuntary."

For one, the Belgian finance minister, Didier Reynders, suggested the EU was "very close" to forging a rollover agreement with bondholders.

But he said forcing bondholders' hands would be dangerous. Not just for Greece, but for Portugal and the Irish Republic later on.

As the Luxembourg finance minister hinted after Tuesday's meeting, some of the talk has been around trying to identify and plug areas of likely contagion in the rest of Europe in the event of a Greek default.

Jason Manolopoulos is an Athens-based fund manager - co-founder of the emerging markets hedge fund, Dromeus Capital. He is also author of a new book, called Greece's Odious Debt.

He is convinced Europe will find the necessary financial sticking plaster to keep Greece alive in the next few weeks.

Passing the buck

"All the parties - the Germans, the Eurozone, the ECB and the Greeks - are playing a game of chicken," Mr Manolopoulos says.

"They each have different goals. The Greek government is trying to protect its sovereignty, the ECB is trying to preserve its credibility, while several nations involved are thinking about their electorates."

He says Europe knows that when it comes to a final vote, it is not yet ready to face the consequences that might follow from allowing a default.

Mr Manolopoulos says what is far less certain is what possible "business model" Greece itself may adopt to try and pay its way in the future.

How will it retrain and support the many likely to lose their livelihoods, as present and future spending cuts kick in?

Greece may not be able to devalue its euro currency to help exports. But it has cut imports. And it has already seen "internal devaluation" of between 20% and 40% in key costs such as wages and house rents.

In spite of everything that it has done so far, in financial terms it remains a failed state. Yet if it is still unrealistic for the country to become a specialist, "value-added" producer on German lines, can it possibly carry out the labour and market reforms that would be needed to turn it into a low-cost producer?

After spending time speaking to many of the protesters on the streets, Mr Manolopoulos says Greece simply has no alternative proposals to a painful period of austerity.

The only common plea he hears on the streets is that the current array of politicians of all parties should leave office en masse - and leave a new generation to determine their country's economic future.

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