Ancient Greece famously had a few wars that went on a bit longer than any one really planned for. Peloponnesian Wars, Trojan Wars and so on.
Modern Greece, of course, has its debt crisis and bailout.
And so here, in the form of a Citigroup note on Monday, is a bit more on the recent meme that this bailout will indeed last longer than its current scheduled end-date of 2013.
We’ve already had the prospect of loan extensions for Greece dangled before the market, in response to fears over the amount of Greek debt maturing in 2012. Those bonds promptly rallied, even if Germany has come out strongly against on the idea.
Citigroup’s arguments for a longer bailout don’t exactly provide grist to this rally, however. They’re focused on the wider — ambitious — fiscal mechanics that Greece is relying upon. A much harder problem.
As analysts Jürgen Michels and Giada Giani argue:
Tax revenues are not improving in a sustainable way because the economy is contracting, both in real and nominal terms (-3.7% YY and -1.0% YY, respectively). In turn, the economy is contracting primarily because of the policy-induced fiscal tightening… True, revenues may start rising somewhat faster in the next few months as the effects of higher indirect tax rates become more visible, after the fading out of temporary distortions caused by front-loaded consumption. However, we reckon that Greece will see a meaningful improvement of the revenue ratio only when and if tax compliance starts ameliorating.
And matters of tax behaviour are indeed hard to change in a matter of months. Citigroup reckon that a recent tax amnesty will do more harm than good in so far as it might create expectations of further amnesties.
There are other fiscal complications to look out for as well, it seems:
Some negative surprises on the fiscal developments may come before year-end also from the expenditure side. Expenditures have been clearly below their targets in recent months, but no details are yet available (as pointed out by the recent IMF and EU Commission reviews) on the amount of arrears which have been possibly accumulating (a common practice in the past). That means that expenditure cuts targets may have well been over-achieved because lower-tier governments and social funds did not pay their bills on time.
Add to this the persistence of high interest payments, and the problem does seem to be that these familiar institutional flaws will continue to hamper Greece in 2012 and 2013. As Citigroup note:
…so far the underlying factors that have forced the aid for Greece in the first place still exist. We guess that these factors will still exist in two to three years time, as an only modest economic recovery in the euro area on average and ongoing sub-par growth in the periphery countries probably will keep pressure on the banking sector. The newly requested higher capital ratios are likely to create additional hurdles for European banks in coming years.
…To us, Greece’s huge gross borrowing needs over the next five years make a default event pretty likely if Greece were to go back to market funding by 2013.
So don’t let it, then. Citigroup take a dark view of potential institutional supports for Greece that would stabilise its return to the market — the European Central Bank will be winding down bond-buying, for example.
Then again, simply extending the current bailout would be difficult, as it would need approval from German parliamentarians who might well be campaigning in a general election by 2013.
So Citigroup present an interesting Plan B, based on Europe’s SPV:
To be clear, the extension of the €80 bn Greek help program via the EFSF and an extension on the €30 bn IMF funding — effectively a rescheduling of the Greek debt — are unlikely to solve the Greek problem of a massive interest burden of around 8% in 2013. But, it would give Greece some more time in order to return to a more sustainable path of growth and, possibly, to a higher primary surplus, which might help to restore fiscal sustainability. As Greece probably will still have huge difficulties to access market funding in order to repay its maturing privately-owned debt from 2013 onwards, it cannot be ruled out that Greece may get even additional funding from the EFSF/ EU/IMF (on top of the €110 bn) in order to prevent a debt restructuring.
Not how this was supposed to end, to be sure.
Related links:
The once and future sovereign crisis – FT Alphaville
Beware Greeks bearing game theory – FT Alphaville
Grim Greek austerity arithmetic – FT Alphaville