Greece Debt Crisis
Much has been made of the buyback announced as part of the latest Greek debt reduction deal. Mainly because more than half of total debt savings agreed are expected to come from the buyback, according to this leaked doc. The details of how the scheme is might actually work are pretty thin on the ground, but we know from the leak that the plan is to spend €10.2bn (from the EFSF most likely) buying back and retiring bonds. It is expected that this will lead to a reduction of 11 per cent of GDP by 2020.
Gary Jenkins of Swordfish Research aspired to have more thoughts on the latest Greek debt deal by Wednesday morning. Alas, it was not to be: I was hoping that having had a further twenty four hours to digest the Greek debt sustainability plan that I would have a lot to add to yesterday’s comments, but I don’t. There have been press reports (FT) that the measures to be implemented will only bring the debt/GDP figure down to 126.6% rather than the 124% announced but I think by now we are all used to the initial figures released being subject to revision pretty quickly. We agree — the figures around Greece always come with implied aspiration.
The IMF’s desired target of a 120 per cent debt-to-GDP ratio by 2020 has been replaced by 124 per cent by the same date — thanks in large part to official creditors taking a lower interest rate on repayments from the original bailout. A lot also seems to hinge on the Greek debt ‘buyback boondoggle’, which is now well and truly on the table.
A deal, a late-night press conference, an inevitable fudging of the numbers. You know the rules. Eurogroup officials will hold a press conference on Monday night at 11pm CET – or at least, that’s the time given in this link…
There are so many aspects surrounding Greece’s ongoing refinancing needs still up in the air, it should come as no surprise that the agenda for Tuesday’s meeting of European finance ministers has reportedly been shrunk to addressing how an immediate €15bn gap can be bridged through to 2014. A further €17.6bn seemingly required to take the country through to 2016 can be discussed later.
While Lagarde and Juncker go at it in the policymaker equivalent of hammer and tongs over timetables, there’s a risk here of people forgetting the numbers involved. Because they don’t add up. Consider these two tables from David Mackie at JP Morgan. Click to enlarge.
So, we’re going to the wire once again in the now traditional dance between Greece and the troika. As the FT reported on Thursday: Eurozone leaders face a new round of brinkmanship over Greece’s €174bn bailout after international lenders failed to bridge differences on how to reduce Athens’ burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.
Pushing a fresh austerity package (the price of financing the next stage of the country’s bailout) through parliament on Wednesday night cost the Greek government and Antonis Samaras, the centre-right prime minister, dearly. And while there is no guarantee a repeat performance can be staged, there is every probability the boulder will slip and one will be demanded.
From Gary Jenkins at Swordfish Research: Strange to think that over 100 million votes cast in the US may have less impact upon the markets over the next month or so than some 300 votes due to be cast in the Greek parliament this evening.
The Greek parliament will vote late Wednesday on the structural reforms and budget cuts demanded by the Troika. Reports suggest that the government will be able to get a majority. But in a last minute attempt to derail the vote, the country’s two main labour unions called a 48 hour general strike that started today. These are the some of the scenes:
Greece’s new budget was announced on Wednesday. With it came projections for the country’s economic health. The patient is not well. Even before the government’s own-self assessment of conditions, revisions by the IMF alone revealed the deterioration, as Exotix’s Gabriel Sterne points out in a note on Thursday. More of his analysis further down, but first this from the FT on the Greek government’s figures:
So, the Greek government has left this latest, very long, round of eurozone marriage counselling to head into, well, predictable domestic acrimony with headlines like “Crucial Test for Greek Coalition” trailing in its wake. From the ekathimerini: “We did everything we could. We achieved significant improvements,” noting that Greece would remain in the euro if the package was passed and otherwise risked “descending into chaos.” “It is now down to the sense of responsibility of all political parties and each individual MP,” Samaras said. Democratic Left issued a rejection within minutes, saying it does not agree with the outcome of negotiations with troika and repeating its objection to labor reforms. JP Morgan’s Alex White points out that the next few weeks are going to be critical and that this one is likely going to the wire… again.
It looks like Germany has decided that Greece hasn’t given up quite enough of its sovereignty yet. We know that Wolfgang Schaeuble wants to set up an escrow account to make sure loan installments stay out of Athens’ reach (in order to guarantee that debt repayments are made to creditors). But it seems that Berlin also wants to put any money from a Greek primary surplus into that account.
We’re feeling very nostalgic. From the WSJ: Euro-zone countries are considering a proposal that would see Greece cut its debt by buying back bonds held by private creditors at a discount. The exercise–one of a number of options being studied–could persuade the International Monetary Fund to sign off on a loan payment desperately needed by the debt-laden country and keep Greece’s bailout on track for the medium term, two officials with direct knowledge of the discussions said Thursday.
Clearly, the sense that Greece has stepped away from the brink of getting kicked out of the eurozone is the key driver, coupled with expectations that Brussels will give Athens a loan repayment extension. Recent comments by eurozone officials quoted by Reuters that Athens could use funds from privatisations of state-owned assets to retire debt also don’t hurt: “The privatisation process is finally kicking in, the structure is ready,” the official said. “You could expect a few billion euros from privatisation to buy back debt. This could happen relatively quickly.” The debt swap plan seems to be working, then, but we wonder for how much longer…
Citi are pushing that fateful day back: We have held the view, since May 2012, that a Greek exit from the euro area (“Grexit”) in the next 12 to 18 months is a high-probability event (90%) which we assume, for the sake of argument, would happen on January 1 2013. We are now cutting the probability of Grexit over the next 12-18 months to 60% and judge that this event will probably happen later than we previously thought, most likely in 1H 2014. A cynic might suggest they were getting the jitters as deadline approached but lets hear them out (our emphasis).
There are two fairly important bits to this story in Der Spiegel. One, that Merkel wants to avoid a Grexit for the time being and two, that the upcoming Troika report might be massaged to make that a reality.
Ahead of Greek PM Antonis Samaras’ meeting with Angela Merkel on Friday we thought a look at Germany’s cast and position might be worthwhile… especially since the Greek leader is set to pitch for a two-year extension to meet fiscal targets set out in the loan agreement at that meeting. As the FT notes:
Has the single currency been good to you? It’s a question sure to inflame people across Europe, many of whom seem to believe they’ve suffered while others have made out like bandits. The answer is pretty straightforward, according to Paul Donovan at UBS. If you look at the growth in household real disposable income between 2000 and 2010, those living in peripheral countries have benefited the most.