Greece Debt Crisis
Target2 balances reflect euro area’s potential to be better than traditional exchange rate peg regime
Think of it within the context of the balance of payments as foreign exchange reserves that can never be depleted.
The collapse of the Greek economy is almost without precedent. Real household consumption has dropped by 27 per cent since the peak. During the global financial crisis, this figure “only” fell by 6 per cent before rebounding:
The replacement of market funding with increasingly concessional loans from the “official sector” may have reduced the Greek government’s balance sheet debt by as much as €200bn, yet the headline numbers haven’t captured any of this alleged gain. In our previous post we looked at whether this was reasonable, focusing on several sets of accounting guidelines to see how they might apply to Greek sovereign obligations: International Financial Reporting Standards (IFRS), International Public Sector Accounting Standards (IPSAS), the European System of Accounts (ESA 2010), and Eurostat’s Manual on Government Deficit and Debt (MGDD).
We’ve raised the possibility Greece’s sovereign debt burden is far lower than the headline figures — and the potential significance of this — in previous posts. Now it’s time to dig in. (The idea was brought to our attention by Paul Kazarian, whose Japonica Partners has a position in Greek government bonds and would stand to profit from a compression in risk premiums. His interest in the outcome doesn’t necessarily mean he’s wrong.)
After years of failed attempts to stabilise the Greek economy, the Greek government finally got debt relief in 2012. As we explained in our previous post, interest payments fell by more than half between 2011 and 2013. Since the 2012 modifications, Greece’s sovereign debt service costs have been significantly smaller as a share of total output than in Italy or Portugal. Yet it hasn’t helped much. The economy continues to contract and Greece’s depression since 2008 is among the absolute worst of any country in the world since 1980. Investment spending had already plunged by 60 per cent in real terms between the peak in 2007 and the end of 2011. Since then, it’s dropped another 13 per cent. Overall, Greece has had no economic growth since the beginning of 2013: Part of the reason: the debt modifications failed to convince private investors to return to Greece, despite having “solved” the problem of government debt service costs.
Last week, we revealed a significant discrepancy between the Greek government’s net debt as reported by the International Monetary Fund’s World Economic Outlook database and what you’d get if you replicated the IMF’s standard methodology for netting out “financial assets corresponding to debt instruments” using data published by the Bank of Greece. Neither the IMF nor the Bank of Greece had responded to our requests for an explanation of the discrepancy at the time we wrote our original post, nor did either institution respond in time for our follow-up discussion of the Greek government’s equity portfolio. Four days after we’d emailed our original question (while we were on holiday) we finally got some responses.
According to data published by the Bank of Greece, which follows common standards set by the European Central Bank and Eurostat, the general government sector of the Greek economy owned financial assets worth about €86bn at the end of 2015. Of that, about €18bn consisted of claims by various levels of government on each other, specifically about €3bn in T-bills, €7bn in Greek government bonds, and €8bn in short-term loans from local government to the central government. Net out those claims and the general government sector of the Greek economy held financial assets of about €68bn at the end of 2015.
According to the International Monetary Fund, the Greek government’s financial assets were worth around €3bn in 2015, or less than 2 per cent of GDP. That’s what you get if you take the difference between general government gross debt and net debt, as reported in the latest version of the World Economic Outlook Database. Yet according to our independent analysis of data from the Bank of Greece — and using the IMF’s preferred definitions of what should and shouldn’t be counted — the Greek government’s financial assets appear to be worth around €30bn in 2015, or about 16 per cent of GDP.
Time is a flat circle, which is why the Greek government is set to run out of money before debt payments are due to the European Central Bank in July — just like last year, and despite last summer’s supposed deal between the Greek government and its various “official sector” creditors. As before, the immediate cause of this latest crisis is the persistence of disagreements about the size of the budget surpluses (excluding interest) the Greek government is expected to generate, the specific “reforms” the government needs to implement, and the need for debt relief. The fundamental cause, however, is that the Greek government can’t raise money from the private sector at reasonable rates. Why?
This guest post reviewing the current Athens Biennale is from David Adler, a New York-based economic analyst who is also an artist. He is currently preparing a monograph for the CFA Institute’s Research Foundation on “Financial Frictions” and co-authored an anthology “Understanding American Economic Decline” (Cambridge University Press). * * * *
And so FT Alphaville comes across “TENDER OFFER MEMORANDUM — INVITATION FOR TENDER IN RESPECT OF BONDS OF THE HELLENIC REPUBLIC”: the official launch of Japonica Partners’ eye-catching attempt to buy up to 10 per cent of Greece’s restructured bonds, in a kind of Dutch auction. And there’s one very important point here.
Well, the apparent uselessness of Finland’s Greek ‘collateral’ is all very embarrassing, and it’s also terribly public by this point. But surely there can’t be that much backlash over this rather arcane derivatives transaction. Ah, hold on.
We are not quite sure what is going on here. Japonica Partners, a self-styled “entrepreneurial co-investment firm” based in Providence, Rhode Island, has launched a tender offer for almost 10 per cent of all Greek government bonds in circulation. It’s ready to buy paper worth €2.9bn at par, paying a minimum of 45 per cent of face value.
Somehow — was it the ludicrous secrecy, maybe? — you could tell this was coming. On Wednesday, Jan Hurri at Taloussanomat took advantage of the Finnish government’s recent doc dump in order to reach a conclusion about its deal for ‘collateral’ on Greek bailout loans:
Eurobank recently lowered the over-collateralisation (OC) of its second covered bond programme to the bare minimum allowed by Greece’s covered bond law. Avid covered bond-watchers (there must be a handful of you out there) will know of course, that specially designed legal frameworks are one of the big perks of the covered bond structure – along with juicy benefits like an overstuffing of assets and the dual recourse nature of the centuries-old debt instruments.
Greece may have an ongoing issue or two, but that didn’t stop its government debt rallying 274 per cent in the second half of last year. Clearly, the driver was the reduced likelihood of it leaving/being kicked out of the eurozone, rather than the (dismal) economics. Gabriel Sterne at Exotix says the run was one of the “most astounding sovereign bond rallies of all time”, but that the bonds are now over-bought. The declining possibility of a Grexit, he says, is more than fully priced in (his emphasis):
You’re just not cool these days if you aren’t operating some sort of circular mechanism to reduce your debt levels in the eyes of the outside world. And it appears that Greece, sick of being bullied by the circular crew, is looking to get in on the act. We’re talking about the Greek debt buyback, which should be completed on Friday if deadline talk is to be believed.
No explanation had been given by S&P at pixel time. [Update: it's pasted below the jump.] But the situation is pretty clear: Greece’s “voluntary” buyback of the PSI bonds is being carried out in distressed conditions (ie it will otherwise lose eurozone financial support).