The price action in Greek government bonds on Monday morning:
Volatile huh? But probably unsurprising as we still don’t really know what was discussed at Friday’s mysterious meeting by eurozone finance ministers, or why the meeting was even held.
The FT reckons European officials are preparing to revamp Greece’s bail-out package.
Not by tackling anything head on, you understand, but by bunging the country some more cash to meet debt repayments in 2012 and 2013:
Eurozone ministers this weekend publicly acknowledged that Greece would probably need additional cash from the European Union or other international institutions.
Recall that Greece needs to raise €25bn-€30bn next year (beyond what it will receive from the EU/IMF) to meet debt repayments, and about the same amount the following year.
And to state the obvious bond prices suggest there is no chance of Greece be able to raise the money in the market.
However, Friday’s meeting apparently discussed other options, including a ‘voluntary’ extension of 2012 and 2013 debt maturities and some form of collateralised lending by the eurozone.
Now, an extension would certainly buy Greece some time but it really wouldn’t solve anything, says Gary Jenkins of Evolution Securities.
Extending 2012 and 2013 maturities would buy some time, though there would have to be some incentive for holders to voluntarily agree to receive their money back later and with €31bn of debt maturing in 2014 the exercise would most likely have to be repeated again in a couple of years’ time. For any debt extension to buy a meaningful amount of time we are probably looking at extending all debt by something in the 15-20 year range rather than just getting past the next couple of years. It is also worth bearing in mind that debt maturity extensions do nothing to reduce the overall amount of debt, but if pushed far enough into the future it can allow growth to reduce the debt/GDP ratio
With Greece’s debt set to reach about 160% over the coming couple of years, it will take quite a few years of reasonable growth to reduce that ratio.
In any case Jean-Claude Juncker, Luxembourg’s prime minister and chairman of the eurogroup of finance ministers, has said the option of restructuring has been excluded and Greece won’t be leaving the eurozone:
We are not discussing the exit of Greece from the euro area, this is a stupid idea and an avenue we would never take.
Famous last words, perhaps. Although Friday’s Der Spiegel article spells out why Juncker and the German’s are keen to avoid such an outcome.
Sources told SPIEGEL ONLINE that Schäuble [Germany's finance minister] intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.
Devaluation:
“It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro,” the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble’s staff have calculated that Greece’s national deficit would rise to 200 percent of gross domestic product after such a devaluation. “A debt restructuring would be inevitable,” his experts warn in the paper. In other words: Greece would go bankrupt.
Capital flight:
The currency conversion would lead to capital flight,” they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. “This could not be reconciled with the fundamental freedoms instilled in the European internal market,” the paper states. In addition, the country would also be cut off from capital markets for years to come.
Damage to the ECB:
The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to “write down a significant portion of its claims as irrecoverable.” In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) “Given its 27 percent share of ECB capital, Germany would bear the majority of the losses,” the paper reads.
And if that weren’t enough, EU member states that have already pledged €110 billion in aid to Athens — half of which has already been paid out — would have to renounce some of their claims.
All things considered then, it looks as if Greece will be loaned another chunk of cash and the can will be booted even further down the road.
But one day, this issue will have to be addressed.
Related link:
Greek-out culminates in talk of eurozone exit – FT Alphaville