Tuesday, 21 February 2012

…But baby it ain't over til it's over


The Eurogroup ran their latest Greek marathon last night, apparently spending fourteen hours working through a number of semantic features of a bailout which should fund Greece until 2014. To remind ourselves of the protagonists in the affair:
  • In the red Corner, Greece.
  • In the Blue corner, the governments of Europe, the EFSF (owned by the governments of Europe), the ECB (owned by the governments of Europe) and the private sector creditors (banks, ultimately underwritten by the governments of Europe).
The deal that has been done is:
  • The highlight is higher private sector involvement (PSI).  Greek bonds can be swapped for ones guaranteed by the EFSF with 46.5% of the face value (rather than the arduously negotiated 50% scalpings agreed in October).  The interest rate on the new bonds will also be punitive and so the reduction in market value will be higher.  There will be no public sector involvement as the ECB retains the profits on bonds purchased under the Securities Markets Program (SMP).
  • Debt to GDP to be reduced to a mere 120.5% by 2020. This is within a whisker of the 120% demanded by the IMF. What’s half a percent between friends? Certainly within the margin of error when calculating Greek GDP in eight years time!
  • Aside from the higher PSI, the interest rate on already-agreed bilateral loans will be cut by 0.5% over the next five years and 1.5% thereafter – so much for lack of public sector involvement.
  • The ECB will distribute its profits to the national central banks (NCBs). No change here, as I noted last year the rules governing ECB always required it to distribute its profits (although it was never believed there would be so many)!  Presumably the statement is made to emphasise both that the profits have been retained (by which they mean distributed!) and that they will be available to NCBs should the higher degree of PSI cause ructions within their domestic banking markets. If so it is another example of semantic details whereby lower public sector involvement is achieved through higher private sector involvement which is, in turn, underwritten by the public sector. It does seem fairer this way though.

Whilst the devil-laden details are reasonably interesting, far more interesting is the confidential debt (un)sustainability analysis debt which was obtained by the FT - presumably leaked by Europe’s Northern Bloc (Holland, Finland and Germany).  The report reveals that, under the Eurogroup’s baseline forecast scenario, Greece may need a further €50bn by 2015 and a more adverse scenario could require a, clearly untenable, €245bn of bailout funds.

The points raised in this report underline the
common sense in reducing Greece’s debt burden as much as possible now to improve chances of sustainability (as our game theory model suggests) and, whilst the deal tiptoes in that direction, it seems very unlikely that it has gone far enough. Further concessions will be made one way or another and, following the bond swap, these seem destined to land on the public sector.

GUY FOSTER

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