If predictions are correct, the fragile Greece political system will pass the austerity cuts and 2013 budget this coming week. After that, the country is expected to receive the green light for a 31.5 billion euros bailout tranche by mid-November to keep it afloat, as well as a two year extension until 2016 to ease the burden of bringing its primary surplus to 4.5 per cent of GDP, instead of the overly ambitious 2014, which would have heaped even greater pain on the most weary Hellenes.
The long lobbied extension leaves a significant funding gap in the Greek program, which the government estimates at a conservative 15 billion euros. However, brokers like Credit Suisse are taking a dimmer view, forecasting that the funding shortfall for the two year extension could be as high as 40 billion euros if the recession proves deeper than anticipated, bank recapitalisation doesn’t push higher and privatization revenues lag. The truth may be found somewhere between the worst case and best case scenario, at about 20 to 25 billion euros.
To be clear, that is the amount of funds needed by Greece to avoid bankruptcy before being able to resume international capital market borrowings – now postponed to 2017 from the unrealistic 2015. Filling this funding gap will challenge the cohesion of the Troika (EC/ECB-IMF) and will also test the solidarity of the Eurozone and its legal framework, which was built on unforeseeable fault lines.
To date many pundits have been proposing an “OSI”, which in fact means an official sector haircut to their bond holdings, or even a brand new third memorandum with added cash loans for the debt laden Mediterranean country. Both options would be good for Hellas, but both appear unlikely at this stage. From next year until 2016, bonds held by the ECB and the rest of the official sector, like other central banks, add on 27 billion euros. Extending or forgiving payments could solve the gap funding problem.
This is the “OSI” option that the IMF has been furiously pushing for but that the Europeans have been fiercely resisting. But the ECB is staunchly hiding behind legality that would prohibit “monetary financing”, setting a dangerous precedent for it capitalization. It does not seem to want to give up profits on cheaply bought Greek debt which would top 6 billion euros by 2016 to assist with the cash crunch precipitated by the extension. Not exactly a road map for a central bank that wants to solidify the common currency, but welcome news to larger Eurozone states and their politicians, so there is less risk of them putting their hands in their pocket for recapitalisation. And it’s not just the Europeans.
The IMF wants nothing to do with more Greek exposure so they are entirely unwilling to discuss restructuring or lowering of interest or maturity extensions on the 21 billion euros of its loans maturing by 2016. Their excuses is that they are funding most of the cash to rollover those exposures. However, the interest charges to Greece before and after the rollover are hardly generous. Another very popular idea gaining credence is that Greece “buyback” its own bonds totalling 62 billion euros and now trading at deep discounts to the issued par value.
It seems a respectable idea on paper to make the country’s debt trajectory sustainable but won’t help the funding gap by much more than five billion euros for the extension period. The Archilles’ heel is that most of the residual holdings are in the portfolios of institutions that have them held to maturity, not trading, accounts. Its unlikely many would want to sell at 30 cents to the euro. Nevertheless, it’s a very helpful option as part of general strategy for Greece and the eurozone to manage this funding and debt sustainability crisis.
The alternative of a new third memorandum program with more loans for Greece looks exceedingly unlikely because of political constraints. Such a program would need to pass through the parliaments of reticent countries like Finland, Austria and Germany. Politicians want to avoid that poison chalice of selling that to their electorate after bashing Greece since 2010. Without excluding a debt buy back and the issuance of more Treasury Bills by Greece, another very pertinent idea to fund the gap would be to postpone Greek interest payments on EU loans from the temporary bailout mechanism the EFSF which has now been converted into the ESM. Analysts say a moratorium on interest until 2016 would save 23 billion euros in Greek funding needs. It would do the trick.
International broker UBS said that a 50 per cent haircut to both EU bilateral loans and private sector bond holdings that could reduce Greece’s Debt/GDP ratio to 151 per cent by the end of the decade. And then applying the same haircut to EFSF loans could lower the ratio to 125 per cent by 2020, close to the “sustainability target.” It sounds about the best policy direction to give the local economy and business breathing space in the face of ECB intransigence. But as has been the case for the last three years, the problem is a lack of leadership and strategy in Europe and at the IMF. The lenders will enforce their rights to every pound of cash.
Assuming the Greek parliament passes the austerity measures, structural reforms and the 2013 budget, then more than enough sacrifices have been asked from the most vulnerable in Greece. In the worst of all possible worlds the poorest in Greece may end up paying the extension bill and forcing more enterprises to the world. Fair and thoughtful solutions to the funding gap must be formulated so stability returns to the country now grappling with half a decade of recession. Market stability and improve psychology would help a more predictable future, and create a climate where the worst may be behind us so a rebound would come sooner rather than latter.
If Greek lenders listened to the local government and business community and committed to “minding the funding gap” more carefully than the haphazard manner the two programs imposed on the country were fashioned, we can get more quickly back on a realistic and positive track.
* Nick Skrekas is as an analyst and lawyer and has followed the Greek crisis extensively. He has post graduate qualifications in economics, finance and law and is based in Athens.