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Saturday, October 22, 2011

Troika blues

Just a couple of brief comments on the 'Troika' report that's now been out in the public domain for over 24 hours (through various leaks). Linkiesta has the text of the report here.

Just to recap: the European Commission, the IMF and the European Central Bank - the so-called Troika - released (or leaked) their report yesterday and today, on the state of Greece's debt. It is a seriously damning account of the Greek economy (in parallel with reading the Troika report, it's worth re-visiting our briefing on the second Greek bailout). The report basically sets out how Greece would need far more in assistance than previously thought - possibly around half a trillion euros - in absence of far-reaching private sector write downs on the country's debt. As we argued in a report published earlier in the week, and as the Troika have now essentially admitted, private creditors would have to take a 60% haircut on their bonds, in order for Greece to have any chance to return to debt sustainability.

We found this part of the Troika report particularly interesting:
“In keeping with experience to date under the programme, it is assumed that
Greece takes longer to implement structural reforms, and that a longer time frame
is necessary for them to yield macroeconomic dividends...A longer and more
severe recession is thus assumed.”
Basically, the Troika report drops all pretenses, and acknowledges that Greece can't meet the conditions and commitments agreed under the first (and second) rescue packages - it's just a case of accepting that and moving on. It is incredibly telling that this assumption forms part of the troika's baseline (expected) scenario.

Furthermore, the report states that even with a 60% haircut, Greece's debt will still amount to 110% of GDP by 2020, including €115bn which the troika expect Greece to receive from the second bailout(remember currently currently only totals €109bn). In other words, to avoid a further deterioration of Greece's debt, the second bailout as well as the level of private sector involvement will have to increase in size.

Translation: Prepare for another round of hugely painful and frustrating negotiations, between governments, ECB, IMF, Commission and the banks....

In a sort of twisted hat tip to this upcoming strife, one of the footnotes states: "The ECB does not agree with the inclusion of these illustrative scenarios concerning a deeper PSI in this report." Apparently, the ECB and the IMF didn't quite see eye to eye on the level of write downs bondholders should face and Greece's debt sustainability. Forgive us, but given the IMF's extensive experience in the matter we slightly inclined to side with them on this one.

As Paul Mason did a good job of illustrating on yesterday's Newsnight, the chart (on p. 3) comparing the debt sustainability, according to the Troika's updated figures, to the equivalent analysis in the previous Troika report is fairly damning as well. Either the Troika got it completely wrong previously or things have got massively worse (probably both). In combination, this seems to suggest that Greece won't be able to return to the market until 2020, even with the help of a second bailout.

And yet, the Troika seems to suggest - echoing some EU leaders and the ECB - that Greece can avoid a default - even on the back of that report. That can only be described as an insult to the intelligence.

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