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Wednesday, August 21, 2013

Germany finally admits to a third Greek bailout, but what form might it take?

It seems the German government has finally publicly accepted what everyone already knew – that Greece will need some kind of further financial assistance after its second bailout programme expires at the end of 2014. German Finance Minister Wolfgang Schäuble told a CDU election rally yesterday:
"There will have to be another [bailout] programme in Greece," in order to help the country "get over the hill" of debt repayments it faces.
Despite attempts from both the German Chancellor Angela Merkel and German finance ministry spokesmen to row back from the comments and suggest they are not, in fact, a change in stance, the remarks seem to have stuck.

What form might the third bailout package take?
  • According to the IMF, Greece's total funding gap up to the end of 2015 is around €11.1 billion (5.8% of GDP) – so this can be taken as a lower bound of the funding needed. Privatisation receipts (which have notoriously fallen short) are expected to reach €7.7 billion over the next three years. Further shortfalls here could push up funding needs.
  • A further extension of maturities and reduction in interest rates on the official sector loans, as suggested by EU Economic and Monetary Affairs Commissioner Olli Rehn also seems likely. However, interest on loans from the EFSF - the eurozone's temporary bailout fund - are already at cost and payments have been deferred for ten years. The IMF is also unlikely to reduce its interest rate as this would amount to a form of debt restructuring, which the IMF refuses to engage in due to being the most senior creditor. This leaves only the eurozone's bilateral loans from the first Greek bailout, the interest on which has already been reduced to around 1.5% (well below most eurozone states' long-term borrowing costs). Therefore, scope for further reduction is limited, and the benefit it could provide would amount, at most, to a couple of billion spread over a long period, as we have previously noted.
  • Another widely touted proposal is to use the leftover funds originally allocated for Greek bank recapitalisation. So far, according to the IMF, Greek banks have received €40.9 billion out of an allocated €50 billion. Although it seems the EFSF expects this to increase to around €48.2 billion. It is likely some additional buffer will be needed, given the pace of increase in bad loans in Greece, meaning the amount available is likely to be between €2bn and €4bn max.
  • A final idea, reported by Süddeutsche Zeitung, is that EU structural funds could be able to provide some of this funding. It’s not clear exactly how this would happen and, as we’ve noted before, we're sceptical of the idea that there is lots of excess money floating around to be easily reallocated in the EU's structural fund programme. Given that the new EU budget headlines for 2014-2020 are set, it's not clear how much more money can be squeezed out for Greece. One option would be to adjust the 'co-financing rate' (the amount the Greek government contributes to each project to gain funding) but this has already been adjusted and provided little boost to the take up of funds, which remains well below target.
Lots of questions to be answered then about the size and format of what may be the trickiest Greek bailout to date, given the tough political constraints and the on-going (very tenuous) premise of debt sustainability. An important consideration, as Schäuble suggested, will be to get Greece over its funding hump in the next couple of years (data from Greek debt bulletins):


The final point to note is the continuing German aversion to further debt relief for Greece, something the IMF and nearly all private observers accept is necessary. Within Germany, this seems to be a result of the government 'learning its lesson' from the first Greek debt restructuring, which patently failed. However, the German government seems to be learning the wrong lesson for the wrong reasons – it was not that restructuring was a bad idea in itself, but simply that all such a large amount of debt was held by Greek banks that the ensuing recapitalisation and bailout negated any benefit.

The German government clearly remains loathe to discuss any such details, meaning a clear plan is unlikely to emerge until the end of the year. In the meantime, we can’t help but wonder how the Greek public will react to the prospect of another bailout with another set of conditions attached. Could the big unknown outside the eurozone begin to look attractive once again? Maybe, or maybe not - but it may well start to factor into their thinking at some point.

8 comments:

Anonymous said...

Unless tax collection improves and Greek sovereign debt holders take substantial haircuts then there will be a 4th and a 5th bail out too.

Ditto for some of the other Mananazone countries too.

When will Merkel and Schäuble tell this to their electorate?

SC

Michael Wohlgemuth said...

Great analysis, as always. Intersting to see Greek media reaction: (a) "Schäuble threatens us with a new bailout" and (b) "finally Greece decides German elections" http://www.spiegel.de/wirtschaft/soziales/griechische-medien-attackieren-schaeuble-a-917777.html. Pollsters expect that Greece will play much of a role in the elections, but might help the government and the AfD: http://www.faz.net/aktuell/wirtschaft/europas-schuldenkrise/interview-mit-meinungsforscher-guellner-vom-thema-griechenland-profitieren-regierung-und-afd-12540878.html

Jesper said...

There are newspaper-reports which claim that 60bn EUR of taxes aren't being paid in Greece. One sixth of that amount is expected to be collected. Would leaving the euro improve tax-collection?

Don't lend money to an entity that can't collect what it is owed. The Greek administration can't/won't collect what it is owed...

There might be another programme where the unspoken word, "bailout", might have been left unsaid for a reason.

Rik said...

1. If they are intellectually honest the only way possible is an OSI. The possibilities normally open like excess bank stuff and loan conditions are peanuts seen the gap.

2. However an OSI haircut of a considerable amount is probably the last thing they want to sell at home. And not only in Germany.

3. On the other hand hard to see that the IMF leaves it max 124% condition.
So looks like a considerable chance of a collision. Difficult to predict how that will play out.

4. Looking at the original prognosis a decent amount will be required. Hockeystick didnot make it and Saturn V looks unsellable. Something has to give.

5. Strange that Schauble brings it up at this moment. This was going to get a lot of media attention.
Anyway the SPD probably will shoot itself in the feet again on this like they usually do.
But it gives AfD a last chance. Which they probably mess up again like a few before. Not the right populist material simply too academic and too decent (and too boring).

jon livesey said...

Sometimes it's a good idea not to try to solve the immediate problem, but to step back and ask how we got here in the first place.

Greece joined the EU even though it's not contiguous with the other EU countries, is economically more similar to Middle Eastern countries than to the rest of Europe, isn't competitive with Turkey in tourism because of high costs, and has defaulted on its debt five times in the modern era, and in fact has been in default for roughly 50% of its history as an independent state.

In the eurozone, Greece maintained a semi-European standard of living by over-borrowing and by misrepresenting its finances.

So is the real question whether Greece needs a third bailout, or is it whether Greece can ever be a self-sustaining member of the EU and the euro?

The fiction behind the euro is that it is a currency shared by sovereign nations, with no bailouts, everyone looking after their own debts.

The reality is that Greece and a few other peripheral countries are starting to look more like some of the poorer US states which receive transfer payments automatically year after year, and have done for a couple of centuries, and which no-one seriously ever thinks will become self-sufficient.

The eurozone can keep slapping sticking plaster on the Greek situation - I am sure that if they try to lay hands on structural funds they will get another Cameron veto - but sooner or later they are going to have to answer the bigger question: can Greece function as a member of the eurozone in the long run, and what institutional changes to eurozone finances will it take?

Rollo said...

When a boat is leaking you can bail it out. But you also have to stop the leak or you will sink however much you bail. But the cause of the leak is membership of the Euro and the inability of Greece to compete with the might of industrial Germany while sharing the same currency. These factors are shooting new holes in the sinking Greek ship, and no matter how fast or often it is bailed out, it will still sink. The cause must be eliminated first.

Jesper said...

I suppose it is a a sign of the times that financial commentators focus on selling out public assets over improving tax-collection. The option of collecting taxes that are due isn't even mentioned for an eventual new bailout?

Eight billion by transferring ownership and power over assets owned and controlled by the Greek public through the Greek administration to a few private hands
vs
Sixty billion in overdue taxes where fifty billion (six times the amount to be gotten from selling out public assets) is expected to be written off. Shortfall in Greek tax-collection to be funded by transfer of taxpayer money from other countries.

The priorities seem strange to me, but I suppose it might be because I'm not in a position to buy Greek state assets at a discount..

jon livesey said...

"I suppose it is a a sign of the times that financial commentators focus on selling out public assets over improving tax-collection. The option of collecting taxes that are due isn't even mentioned for an eventual new bailout?"

It could be that selling public assets can often result in them being run more efficiently and for profit - or at least that was the UK's experience - while concentrating on collecting taxes can only transfer cash from the private sector to the public sector, where it is likely to to be wasted, and can even end up driving productive citizens out of the country.