More delays in Greece may not be an option...

Following another postponed meeting of eurozone finance ministers, there have been reports that the eurozone could try to delay the second Greek bailout package (possibly until after the elections in April) or just pushed ahead with part of it (the voluntary restructuring of Greek debt).

As reported by the FT and the WSJ in the past day or two, a draft of the latest bailout agreement has been circulating, however we believe that some of the issues which the drafts raises have been underplayed - particularly those that impact the chance of delaying or breaking up the bailout.

The draft lays out how some of the bailout funds will be used:

Bond sweeteners - €30bn
Funds to buy back bonds from the Eurosystem - €35bn
Funds to pay off interest - €5.7bn
Bank recapitalisation - €23bn
Total - €93.7bn (out of the €130bn bailout)

This is money needed to make the PSI successful and allow the voluntary restructuring to be completed. Firstly, this highlights that the claims by the eurozone that they could simply push ahead with the PSI without fully approving the second bailout seem to be incredibly misleading. Without this money in place there would be a huge amount of uncertainty on the part of bondholders, particularly Greek banks who would need new capital injections to survive. However, to disperse this substantial amount of money would need full approval from the eurozone and some national parliaments. Given that it is widely accepted that the PSI needs to be put into motion this week if Greece is to avoid a disorderly default on 20 March getting this money released could be a huge stumbling block.

Secondly, where would this money come from? The draft stipulates that the EFSF will issue debt to raise these funds (since it currently only has guarantees), however, it is has not pre-funded any of these commitments and suddenly flooding a subdued market with over €90bn in (possibly non-triple-A) EFSF bonds is not an effective funding strategy. There is no telling how the market will react or at what cost the EFSF will be able to borrow. The urgency of the situation feeds the uncertainty here and could be catastrophic for Greece.

Lastly, with new provisions such as €35bn for bond buy backs, will €130bn be enough to fund Greece for three years? We questioned whether this was even enough originally, now it seems even more unlikely.

The chance of getting approval for and raising this amount of funds in the time necessary (a week or two max) seems unrealistic. But it is also unlikely that eurozone finance ministers will delay the PSI further, simply because they cannot afford to. The eurozone has once again backed itself into a corner and things are likely to get worse before they get better.