Thursday, 23 February 2012

Bail-out, Debt (Un)-Sustainability Analysis for Greece: where are we in the Crisis Resolution?

Another marathon session in Brussels and, as expected, Greece got the 2012 bail out.  Talk of a possible Greek default through a refusal by the donors to cough up proved to be hot air.

As argued in my earlier blogs, the brinkmanship was all part of the to-be-expected Intergovernmental  and collegiate nature of Eurozone decision-making and to show national electorates in the donor Eurozone north that their politicians have cojones (as well as substantial tolerance of caffeine for the 13-hour sessions) to defend the budget support/aid flows into Greece at a time of growing angst about domestic growth and austerity in their own economies.

So where are we now?

Well Greece has got the €130bn and a PSI that results in an effective reduction by 50% and a projected creditor take-up of 95%.

Lets start with the Debt Sustainability Analysis paper presented to the Eurozone Group .  Dated 15 February 2012 and jointly authored by the Troika (EC, ECB, IMF) it is notable in its honest frankness about the substantial downside risks ahead. Lets look at the main points before assessing what it means:

  1. Growth will be lower in Greece in 2012-13 than previously forecast which in turn means public debt as a share of GDP in 2020 is now expected to higher than the target 120% target by 2020 and as high as 178% before declining thereafter (it is hoped..).
  2. There is formal acknowledgement that Greece will require further “official” financing and the range is between €50bn -€245bn, highlighting the uncertainties ahead.
  3.  The converse of point 2 is that Greece will remain locked out of access to private flows via capital markets  - both due to its credit fundamentals but also because any new debt will in effect be junior to existing debt . Add to this a revision of costs of bank capitalization by €10bn to €50bn.
  4. A re-hash of the first point: an explicit recognition that fiscal compression - to first eliminate the deficit/s and then to run surpluses in order to reduce the debt burden – is at odds with the aim to raise the competitiveness or internal devaluation in Greece since the debt to GDP ratio will actually and initially rise (debt constant but GDP will be lower)
  5. Acknowledgement that the ECB’s Securities Market Programme (SMP) which is valued at €282bn and with guestimate €50bn in Greek bond holdings, could be used as one future channel to reduce the exiting debt burden further .

What does this all mean?

  1. There is a tacit acknowledgement that Greece is in effect insolvent (ie. including projected revenues from privatisation receipts) and as such will need further bailout/s with a real possibility of total write-off of its external liabilities an increasing probability.
  2. The timeframes  for further support will , as until now, be conditional on the iterative step-by-step measures  and further caffeine-fuelled sessions in Brussels, the political machinations of the EU and the emerging Eurozone Fiscal Grouping/Fiscal Compact, the election cycles of the donor Eurozoners and of course the outcome of the Greek elections.
  3. In return for the current bail out the official creditors have asked for a de facto EU Convergence-cum-IMF Stabilisation Programme, with the first part for would-be EU-entrants but much harsher. Greece ducked the strict criteria applied to the new entrants in Central and Eastern Europe in 2004 (and which I was involved with and now so in the W.Balkans) and that has partly been the Achilles heel for the rest of the Eurozone Currency Union. The real test will be whether this focus on re-visiting the necessary part of the convergence machinery:   institutional building, regulatory reform eg land registries etc.  as well as liberalisation of service and product markets plus a massive shift in fiscal management on both revenue and expenditure management will carry traction – the key difference with the new EU Member States is that the latter had “ownership” of these reforms as part of the entry ticket to the EU’s Single Market as well as promise of soft transfers through Structural and Cohesion Funding.
  4. Although not covered in the Debt Sustainability Analysis, one major worry has to be also the Current Account Deficit and the financing thereof. With outright devaluation not feasible and with little sign that Net Exports will provide sufficient upside, Greece will have a Financing Problem on the External Account. In one sense the reduction of capital flows on the Capital Account will limit the financing capacity and thereby help to negate the problem. That said there will be need of sufficient financing to ensure that the country doesn’t run out of sufficient necessities – at least in the form of energy imports.
  5. Credit crunch and the private sector. With a smaller State and Net Exports in doldrums, the private sector has to be the engine. However there is worrying evidence that the sector is compressing  in part due to the credit crunch domestically and also to problems with trade finance across borders.


A lot of imponderables and uncertainties still ahead for Greece and the Eurozone. Whilst the financial markets and asset managers have focus on particular time-frames and returns, from a policy perspective there is real need to shift to a longer-term strategic focus of what is the future of Greece in the EU and the Eurozone.

Exit from the Eurozone (aside from the costs) will still leave Greece in the EU and with existing structural flaws that need address. Within the Eurozone, now, continued and accelerated austerity alone – with a further  envisaged decline in real primary expenditure by 20% up to 2015 is simply not credible in terms of the already fragile social cohesion in Greece (with Syria in flames and the Arab spring not quite bearing fruit this has to be avoided at all cost). Encouraging initiatives emerging out of Germany about a de facto Greek Marshal Fund suggest a good start – and point out another corollary likely to emerge and which will be the focus of the next blog.

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