The European Summit of October 26th has led to a significant initial agreement which could potentially bring an end to the Greek debt crisis, providing it is implemented correctly by all sides, and providing further financial contagion does not occur.
The private sector financial institutions have agreed—in principle—to a 50% haircut on their outstanding Greek government bonds. According to a UBS study quoted by Kathimerini, this debt is held approximately as follows:
· EUR 55 bln by the European Central Bank
· EUR 18 bln by the International Monetary Fund
· EUR 48 bln by the Eurozone countries involved in the first bail-out
· EUR 74 bln by Greek and Cypriot banks
· EUR 26 bln by Greek pension funds
Approximately EUR 129 bln is held by foreign banks and financial institutions. It is the amount held by the foreign and Greek banking sector, approximately EUR 204 bln, which is to be written down by 50%, or by approximately EUR 102 bln. No mention has been made of a write-down by Greek pension funds, although Greek Prime Minister George Papandreou mentioned that these would either not be written down, or would be recapitalised in some manner.
| Current | 50% Haircut | |
| 2011 GDP (estimate), EUR bln | 216 | 216 |
| Total Greek Govnt Debt, EUR bln | 350 | 248 |
| Debt:GDP Ratio | 162% | 115% |
| Greek sovereign debt held by: | EUR bln | EUR bln |
| ECB | 55 | 55 |
| IMF | 18 | 18 |
| Eurozone sovereigns | 48 | 48 |
| Foreign Banks | 129 | 65 |
| Greek & Cypriot Banks | 74 | 37 |
| Greek Pension Funds | 26 | 26 |
| Total, EUR bln | 350 | 248 |
| Total Write-Down, EUR bln | 102 |
The media figure quoted, incidentally, is EUR 100 bln, meaning that these figures are fairly close to being accurate.
This represents an important possibility for Greece to return to a measure of financial stability. However, there are an important number of risks associated with this operation:
a. It is not certain whether all financial institutions will comply with the write-down. They cannot be forced to do so, although presumably future Troika lending will not be made to redeem or refinance the bonds held by financial institutions which refuse to participate.
b. There was no mention of interest rates or maturities in the communiqué. These were important parts of the original PSI agreement of July 21st. We understand that the write-down will occur on a voluntary basis, coordinated by the Institute of International Finance, but details are lacking.
c. It is difficult to see how this will be classified as a voluntary operation. If involuntary, then creditors can seek to claim any credit default swap policies on the Greek debt. Furthermore, an involuntary event will trigger an automatic ratings downgrade to “default” by the international ratings agencies, creating at least technical difficulties for the ECB to participate in any further secondary market operations for Greek banks or the Greek government.
d. It will create a major recapitalisation issue for the European banking sector, coming on the eve of at least EUR 600 bln in sovereign debt refinancing needed by Italy, Spain, Turkey and other countries in 2012.
e. The fate of the Greek banking and pension systems, although theoretically guaranteed by a further EUR 30 billion in funding, is entirely unknown.
f. It is extremely difficult to see how Greece will return to markets in the near future, or even by 2020, given the scale of losses suffered by the financial sector as well as the continuing high debt:GDP forecast for 2020. Nevertheless, a “scorched earth” policy in terms of lending may be the only option for getting Greek public finances in order.
The immediate situation in Greece is unchanged. Events are dominated by growing unemployment and business failure; falling consumer income; political divisions; social tensions; and a dysfunctional public sector. Superhuman efforts must be made to implement the Mid-Term Fiscal Adjustment Plan, which will almost certainly tip Greece into depression. The fact that the new bail-out plan requires close monitoring of Greek performance by a permanent international mission will exacerbate political tensions. An election in late 2012 is almost certain, if not sooner.
So, everything depends on implementation, and on avoiding a systemic financial crisis brought about by the Greek PSI and far larger prevailing issues already discussed in this blog.
We believe that the 2012 growth forecast for Greece is far too optimistic, and that a nominal GDP decline of 5% is likely, together with an “official” unemployment rate of between 18-20%. This will create further pressure on meeting fiscal targets. We also see a very limited chance for privatisation income in 2012: EUR 5 billion is an optimistic forecast.
Despite this, we see a high chance of achieving a primary state operating surplus in 2012. We also see signs that the austerity programme is taking effect, and that both revenue and expenditure assumptions may be better than anticipated by end-2011 as well as in 2012-2014.
Greece’s ability to implement its obligations consistently with a modicum of political stability are now key drivers of success. Unfortunately, both factors are in grave doubt, as all opposition parties have already declared their “resistance” to the enhanced technical assistance and monitoring programme expressed as a requirement at the summit.
A detailed Greek macro forecast has been developed and will be published soon.
© Philip Ammerman, 2011
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