Merkel Optimistic, but Greek Rescue Package Could Still Collapse

Some European leaders have expressed optimism that the next round of rescue financing for debt-scarred Greece will be approved by Eurozone finance ministers at a crucial meeting in Brussels on Monday.

Steffen Seibert, a spokesman for German Chancellor Angela Merkel, said in a statement: The three leaders [Merkel, Italian Prime Minister Mario Monti and Greece's Premier Lucas Papademos] are optimistic that the finance ministers can find a solution to the pending questions at the Eurogroup on Monday and thereby contribute to the stabilization of Greece.”

Siebert was referring to a Friday conference call between Merkel, Monti and Papademos in which discussed the Eurozone crisis.

While the Athens parliament approved a tough new austerity program last weekend (envisioning 3.3 billion euros in cuts), there are concerns that the Greeks may again fail to abide by the package, given the government’s previous failures to maintain fiscal discipline.

Indeed, the European Union has demanded that Greece’s top political leaders (across the ideological spectrum) pledge in writing that they will stick to the terms of the latest austerity bill in exchange for the next 130 billion euros ($170 billion) in bailout cash.

Time is of the essence for Athens -- the Greek government is facing a 14.5 billion euro bond redemption on March 20. Without the new bailout, Greece likely cannot afford to pay it and would have to declare bankruptcy.

Some analysts are not optimistic that Greece will even receive the next bailout and may be forced to exit the euro zone.

“The rescue deal could yet collapse,” said Ben May, European economist at Capital Economics in London.

“After all, some core [Eurozone] policy makers have suggested that the negative effects of a disorderly default might be limited and are therefore willing to walk away if Greece does not agree to additional tough conditions.”

May added that if Greece does not meet the new demands, it would be “politically difficult” for the core Eurozone governments to back down, and it could make it harder for them to ratify the rescue deal in their domestic parliaments.

“Greece might even call their bluff and walk away,” May suggested.

“Second, legal wrangles could delay a deal. By providing the [European Central Bank] with preferential treatment, Greece could face legal challenges from private sector creditors. Third, the deal could be undermined if the [International Monetary Fund] fails to endorse it. The IMF has indicated that it wants any package to reduce the public-debt-to-GDP ratio to 120 percent by 2020. But the latest proposal will reportedly only lower it to 128 percent.”

May also noted that if the private sector participation rate is below the ratio required to enforce the new Collective Action Clause [CACs], the whole bailout plan could collapse.