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Thursday, February 16, 2012

The second Greek bailout: Ten unanswered questions

We put out a briefing note today outlining the ten questions and issues that still need to be resolved in the coming weeks in order for Greece to avoid a full and disorderly default on March 20.

The briefing argues that, realistically, only a few of these issues are likely to be fully resolved before the deadline meaning that Greece’s future in the euro will come down to one question: whether Germany and other Triple A countries will deem this to be enough political cover to approve the second Greek bailout package.

In particular, the briefing argues that recent analyses of Greece’s woes have underplayed the importance of the problems posed by the large amount of funding which needs to be released to ensure the voluntary Greek restructuring can work – almost €94bn – as well as the massive time constraints presented by issues such as getting parliamentary approval for the bailout deal in Germany and Finland. While the eurozone also continues to ignore or side-line questions over the whether a 120% debt-to-GDP ratio in 2020 would be sustainable and if, given the recent riots, Greece has come close to the social and political level of austerity which it can credibly enforce.

The briefing concludes that, ultimately, there’s no way Greece can actually ever fully meet the conditions laid down by the EU and IMF – particularly if they keep piling on new demands. The scale of the cuts goes far beyond any fiscal consolidation – successful or failed – that any country has gone through in living memory. The question is instead one of how long the eurozone’s charade of unrealistic conditions in return for more bailout cash can continue. Specifically, will Germany and other Triple-A countries accept half-baked solutions to the big unanswered questions that still haunt the efforts to save Greece?

To read the full briefing click here.


Rik said...

The answer is pretty clear will Fin Mins give Greece almost 100 Bn now (providing they get everything technically done in time)and almost certainly will be faced with another Greek term discussion in 3 months?

Rik said...

If I am not mistaken you have a whole in your calculation. The ECB part was not included in the original 130 Bn, so imho should be added. Which makes the necessary amount higher and likely all the mandates that are there now have to be done again for a higher amount.
The EFSF simply needs to borrow more than originally thought.

Open Europe blog team said...

Thanks for the comment Rik.

It is true that this amount was not included in the original bailout plans but there are some mitigating factors. Firstly, the savings made from the ECB taking part at all should counteract this to some extent. The extra austerity and larger net present value losses for private sector bondholders (than under the original plan) will also free up more funds. Additionally, if the money is used to provide new collateral to Greek banks (while Greece is in selective default - see end note 8) it is possible this money could be paid back fairly quickly once Greece exits selective default.

It is therefore not clear exactly how much extra would be needed. Although we'd agree that many of these points rest on shaky assumptions.

Logically it could be assumed that the new €15bn gap which has been flagged up during the negotiations may constitute the difference, although as we note it’s not clear how this will be filled. Indeed it could lead to a larger bailout despite the continued resistance from eurozone members.

Rik said...

We are getting in some rather formal legal stuff.
1. The ECB has exchanged the Greek bonds into new ones 1:1 nominal (with question how this works for CDS/seniority etc). Mainly as security against a default and 50/70/80% clauses.
2. So the only option will be via dividend (by the ECB).
3. Dividend will be to the NCBs (shareholders of ECB). Or directly as Eurosystem.
4. NCBs will have to distribute to their shareholders (the EZ countries). Is this legally possible with all? Or eg only once a year in the General meeting?
5. This will constitute revenue for the governments.
6. Revenue will be used in the way seen fit by the ones with budgetpowers (usually the parliament).
7. This will have to be done in principle by some sort of budgetlaw.
8. If not received yet from NCB it will create a substantial minus on the current budget.
9. Special rules for intermediate or special budget? Official publication?

The points I want to make is this is a complicated legal way which will take a lot of time. Plus you need probably for every country budgetlegislation (with possibly political problems, like we have seen earlier).

Especially is it most likely will not be postponed till after the Greek elections.

Possibilities to route it via the EFSF and book it differently look no longer possible as an exchange have already be made by the ECB. It will have to go the full formal way.

Rik said...

Btw As far as I know we are now at 129%, so 9% would have to be found.
Which is more than the ECB dividend.
But probably the margins are not that big so with some lower interest it can be solved.

Great piece of work by the way in such a short time.

Open Europe blog team said...

Thanks for the follow up points Rik.

We'd definitely agree with your points about the ECB swap, it does look a long winded and challenging way to deliver a contribution to the Greek bailout (we'll be blogging on this in detail later). Keep in mind though that our briefing was written before the swap was announced/leaked. We were considering the prospect of the ECB using the difference between purchase and nominal value of its Greek bonds to aid the bailout in some way (a prospect which may not completely be off the table yet).

As you note even with all these attempts the debt sustainability analysis still puts Greece at 128% in 2020. Not sustainable by any stretch of the imagination.

Rik said...

The idea was just to complement your earlier excellent work. This looks like an 11th or maybe 11th and 12 th etc point.

The weak point in the execution until now has been (next to the political problems) the low technical quality of people at the E-side.
-Legal work is often rubbish. It is allowed according to EU-law but people forget to check the most important countries' legal sytem.
Safer legal ways are ignored and possible legal ways as entered instead.
-Finance. Eg the loophole between ratings and when default or not was still explored extensively while the CRA's had already closed it.
-Finance. Lever. A blind horse with a Bachelor in Finance could see that a 20% insurance would never bring Italian and Spanish yields down to normal. And they are still struggling with it.
-Whole picture, overview. I doubt if anybody has this. Will ECB swap trigger defaults or CDS, I doubt if people have checked that. Same with a dividend distribution which steps have to be made (and are these realistic. I doubt again if anybody did that exercise.

With this speed (of things) and constantly new facts there is always something not there. It is good to have a great summary as yours to start with. The best way to miss nothing.