European Central Bank board member Lorenzo Bini Smaghi dislikes the analyst ‘herd leaders‘ who have doubted recent ECB policy on Europe’s sovereign debt crisis.
And when it comes to the prospect of a Greek sovereign default, his dislike of banking-types becomes really evident, as made clear in a speech on Friday:
Several market participants seem to be sceptical, in particular about whether the Greek adjustment programme will succeed. In their view – as far as I can understand – the programme is bound to fail for economic, political and European governance reasons. The logical conclusion is that Greece will default, at least partially, or restructure its debt. They are probably taking positions based on this conviction.
And which market participants might he be referring to? Deutsche Bank CEO Josef Ackermann? Nobel Economics Prize winner Robert Mundell? Willem Buiter?
At any rate, CDS investors are still taking a negative view of Greek default risk. Five-year Greece CDS was quoted at 635bps on Friday, compared to 210bps on Spain, Markit said.
Still, it’s far from clear that default is a conviction, and many of the herd leaders’ concerns have focused on possible haircuts for bondholders far more than total losses. Ask the Chinese.
Still, as Mr Smaghi continues, emphasis FT Alphaville’s:
Some analysts have put together a few numbers to show that they are aware of the problem. But I have not seen a serious analysis of the 120-page report produced by the IMF which looks at the various aspects of the programme, including the impact of the structural measures on growth, the sustainability analysis or other features of the programme. Not one review of the realism of the assessments made by the staff of the IMF and the Commission. In fact, I suspect most market analysts have not even looked at the adjustment path for the primary surplus which is embedded in the programme, which aims to reach 6% of GDP in 2015, a level no different from the ones that other countries in the past have implemented to consolidate their public finances.
Having read the IMF Staff Report in question (it has 143 pages, not 120), we are keen to point out a few serious analyses for Mr Smaghi’s perusal.
Starting with, er, the Staff Report itself:
Under the staff baseline, public debt will increase to almost 150 percent of GDP and then decline after 2013, provided that the authorities continue to implement strong and sustained fiscal and structural reforms to comply with their commitments under the Stability and Growth Pact, and Greece regains market access at favorable terms. However, significant uncertainties remain.
Quite, and surely this is the issue in debates over a Greek restructuring (or if Mr Smaghi must, a default). This adjustment path carries some risk to the IMF’s own finances, expressed in pictorial form in this chart:
If all purchases were to be made as scheduled, Greece’s outstanding use of GRA resources would rise to 584 percent of quota upon approval, to about 1,550 percent of quota during the first year of the arrangement, and then peak at just over 3,200 percent of quota in May 2013. In terms of quota, this projected peak exposure would be the highest in Fund history.
So there’s about three years and a veritable Mount Olympus-sized pile of debt to get through before we can be clear that restructuring is off the table. Others — including a former IMF official interviewed by the WSJ — believe Greece has been given a year before restructuring becomes necessary.
Of course, others — even bank analysts – believe that restructuring would do little to lighten Greece’s fiscal load, in fact.
As for other analyses, both Fitch Ratings and Barclays Capital have looked at the projected adjustment and austerity path, and concluded that it is the most ambitious in OECD history.
Curiously, this latter point was missing from Mr Smaghi’s speech.
We prescribe more analyst readings.
Related links:
Et in Arcadia ego – FT Alphaville
Merkel’s calls for ‘orderly insolvencies’ threaten more disorder – FT Alphaville