Italy puts sixth loan tranche at risk

Reports suggesting that Italy and Spain may not be able to contribute their share to the European Financial Stability Facility (EFSF) are generating worries about the payment of the sixth tranche of Greece?s bailout, due in September. At the same time there is continued uncertainty regarding the participation of the private sector.

The sixth installment will amount to 8 billion euros, of which 5.8 billion will come from the eurozone and the rest from the International Monetary Fund. However, the payment of the tranche by mid-September now appears to be at risk, particularly after the increase in the cost of borrowing for Italy.

It is not clear whether all eurozone parliaments will have ratified the new powers given to the EFSF, which according to the decisions of the eurozone summit in mid-July will be the body that will issue the new loans.

As a result, Eurogroup spokesman Guy Schuller confirmed on Friday that the next tranche could be paid through bilateral loans, assuring that there will be no problem with the process in the end. ?The troika will only be in Athens from mid-August onwards and deliver their report at the beginning of September and that is when the decision will be taken,? Schuller said.

However, the likelihood of the next installment coming to Athens in the form of bilateral loans is reduced by Italy?s situation as the country is reviewing its participation in the process. On Thursday Italian officials informed financial officers from eurozone countries in a teleconference that Italy would opt out in September if its borrowing rate is higher than that of Greece?s.

As for the participation of the private sector in the restructuring of the Greek debt, there are more and more estimates that the cost for non-state bondholders will above 21 percent. Rabobank International claimed that the so-called haircut would amount to no less that 40 to 50 percent, while JP Morgan puts it at up to 34 percent.

On the other hand, by calculating the average loss from both bailouts packages, Barclays estimates that the haircut may not reach 21 percent, leading to a cut of just 10 percent instead.