Monday, October 29, 2012

Revising the Greek bailout: Two more years of extend and pretend?

Open Europe published a new flash analysis on Friday, which looks at the prospects of a revision to the Greek bailout. It now looks almost certain that Greece will receive a two year extension to its fiscal consolidation and reform programme. However, questions remain over how much it will cost and how it will be funded. Open Europe estimates that the extension would cost a minimum of €28.5bn, if Greece meets all its targets. Meanwhile, none of the options for providing the funding looks politically or economically palatable.

The €28.5bn comes from: an extra €14bn due to slower deficit reduction, an extra €12bn from reducded privatisation receipts and an further €2.5bn from increased government arrears (unpaid bills).

We examine six key options for filling this gap:
1. A reduction in interest rates - which looks very likely but could only deliver €2bn - €3bn.

2. Increased short term debt issuance and more austerity - this looks possible and could deliver anywhere between €15bn - €20bn.

3. Extending length of loans to Greece - unlikely, it could raise €9.1bn in the short term, but on net it would give zero reduction.

4. ECB forgoing interest and/or profit on its Greek bonds - looks very unlikely, but could yield €1.15bn - €2.3bn (interest rate cut) and/or €14.25bn (forgoing profit).

5. Bond buybacks - again very unlikely, but it would mark a much larger step than simply covering the funding gap, as it could deliver €45.65bn overall and €17.15bn after the two year extension is paid for.

6. Write-down original eurozone bilateral loans -  this would be a huge step and could provide €26bn to €52bn but looks very unlikely to be approved, especially as it would support in national parliaments. 
Overall then, its hard to see how the gap will be filled without some larger decision being taken over the future of Greece in the eurozone. To read the full note, click here.


Rik said...

Re. 1. Isnot the amount annually which would mean over say 6-8 year around 10 Bn. Plus of course a small problem in say Spain and Italy as their borrowing costs to finance this will be considerably higher than the interest charged to Greece. The borrowing costs are not evenly distributed.

Re4. ECB could distribute the profit (bookkeeping profit as it is economically a big loss) to its ultimate shareholders. And these 'bookkeep' it away for some part of the extra financing. Might avoid nasty parliaments in some countries as well.
Probably somewhat more likely.
Allthough the Buba is likley to make a scene of course and demand parliamentary approval for it.

IMF simply needs a 120% max endscenario. Going further over that makes them look totally unrealistic. The EZ will have to come up with that one way or another. Difficult to see them accepting 135% scenarios as sustainable.
My idea the combination of lower interest; ECB 'profit' distribution; more cuts longer term (all 3 likely required to get to the amount) is the most likely.

Merkel's plan of getting 3 things at the same time looks to have failed. Which will put this under more pressure at home. Looks like she will make it (but it will cost her a lot of political capital).
Holland and Finland nobody has considered yet. There might be a problem there. Finland could likely be solved with collateral. Holland is a big ???. De Jager will leave. How much room he still has?(if he does what he really wants Greece is a goner, but he could make it easy for himself). Or with no room the old and new PM (Rutte) might use it to give De Jager the freedom to pull the plug to avoid that he will have to do that later on in say 2013 himself and puts his new coalition under stress. Anyway Merkel will want to keep these 2 aboard and have to consider their positions carefully.

Anonymous said...

All the above uis pure speculatiom

Unless and until Geece fully and

soppeeddly begins to restructure ALL the closed shop trades and professions , end neopotism and corruption, break the power of the unions , collect the arears of taxes, allow competition on domestic shipping lines, end the brown envelope and prohibit all payments over 50 Euros in cash requiring instead payment byu chequue or card THEN AND ONLY THEN ( 20 years!) will Grece return to solvenecy.

Rollo said...

There is no way Greece can return to solvency within the Euro. The debt is 160% of GDP and the 10 year interest rate is 16%. There is no nation on earth that has ever made an operating profit of 26% on its GDP, and Greece is not a contender. The only option is to default; to ditch the Euro; to print their own currency and return to normal life.