This week’s volatility might be Germany-induced, but the overarching fear is still at heart Greek.
And as if on cue after Greece received its first tranche of aid on Tuesday, Fitch has jumped in with a report on the future of the country’s financing.
It’s not for the faint-hearted.
First, Fitch considered the risk that has been apparent for months: that even under a far more realistic IMF adjustment plan, Greece has to scale a mountain of fiscal pain.
As the rating agency highlighted, emphasis FT Alphaville’s:
In addition to the EUR15.8bn (6‐7% of GDP) of fiscal tightening announced between December 2009 and March 2010, not all of which was deemed to be credible, Greece has committed to a further EUR30bn (10% of GDP) of austerity measures in 2010-2013, virtually all of which are permanent, in contrast to one‐off adjustments which featured in earlier announcements. The implied headline fiscal adjustment will be of the order of 11% of GDP, split roughly 64:36 between expenditure and revenue, with the lion’s share of adjustment taking place in 2010-2011.
That’s a brave amount of front-loading, to be sure. Crucially, Fitch is unable to find any comparable adjustment process of such speed and viciousness in the OECD, ever -a point also previously noted by analysts at BarCap.
Then there are broader economic risks, Fitch said:
The key risk for Greece’s public debt dynamics is that the economy suffers a greater-than-expected decline in nominal GDP and the economy veers towards a debt‐deflation spiral, notwithstanding the authorities’ best efforts to fulfil their fiscal targets. Over time, successful and enduring fiscal adjustment, reinforced with structural reforms, should boost confidence and improve sentiment leading to higher investment and growth. In the near term, however, steep increases in unemployment (14%‐15% of the labour force by 2011‐2012) and under‐employment (among the self‐employed), and thus declining disposable incomes, are likely to weigh heavily on business and consumer confidence, potentially deepening the recession and forestalling recovery.
Well, no one said it was going to be easy. And it gets more interesting: the agency noted a curious knock-on effect of the bailout on Greece’s overall debt profile:
By the end of 2012, floating rate debt will have risen to 40% of total debt, as official debt substitutes for fixed rate bonded debt. A shortening of average maturities is also in prospect reflecting the roughly three‐year tenure of IMF-EU funding. Gross fiscal funding needs in the year immediately following the end of the IMF-EU programme will be of the order of 22% of GDP in 2013. However, renewed funding challenges are set to re-emerge over the medium term as higher repayments to official creditors start to fall due from 2014.
How… Sisyphean. In particular, emphasis FT Alphaville’s:
In the absence of a reprofiling of official maturities and/or a further IMF/EU programme, Fitch estimates gross fiscal funding needs will jump to over 30% of GDP in 2014-2015. Paradoxically, therefore, even if the programme is successful, the sovereign stands to be even more exposed to market risk than it was before.
A paradox which brings to mind two further points.
First, BaFin might as well extend the 31 March 2011 deadline on its banning of naked shorts on eurozone sovereign CDS, then, for all the good it will do.
Second, the debate on some form of Greek debt restructuring (latest proposal here) will surely go on for a long, long time to come.
Related links:
Restructuring the Parthenon – FT Alphaville
Restructuring the Parthenon, Part II - FT Alphaville
Et in Arcadia Ego – FT Alphaville