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Monday, July 02, 2012

A summit plus for Greece?

Given that Greece lacked any real political presence at last week’s EU summit, discussions on the crisis in Athens were fairly minimal and it was largely overlooked during the ensuing press coverage.

However, Kathimerini has an interesting report today suggesting that Greece could attempt to get the cost of its bank recapitalisation removed from its sovereign debt levels – in the same way that Spain is hoping to do. This could well be seen by eurozone leaders as a way to quickly reduce Greece’s debt burden – although we don’t think it will change any of the fundamental problems which it faces.

A large amount of the second Greek bailout – around €50bn – is actually going to Greek banks to help them absorb the large losses they faced from the Greek debt restructuring. With Greek debt currently standing at around €327bn or 160% of GDP, removing €50bn from this figure could provide a significant boost to Greek debt sustainability – bringing the figure down to 136% of GDP.

There are, however, a few important caveats to note here:
  • Firstly, 136% is still an unsustainable debt level, even with this reduction the Greek debt burden is still huge and the need and demands for austerity are not likely to waiver . 
  • Secondly, and possibly more importantly, is that this will only be an adjustment on paper for all intents and purposes. Greek banks are dead on their feet, living off liquidity from the ECB and the Greek Central Bank. They will never be able to repay this money and it will still ultimately be underwritten by the Greek state. So, even if this debt is shifted off the official figures it will still be a burden of the state – in reality little will have changed. 
  • Lastly, this process will not happen anytime soon. The bailout funds cannot lend directly to banks until the ECB is in place as the eurozone’s financial supervisor, and as we have noted, this will be at the earliest the start of next year. This also happens to be the period by which we have suggested that leaving the euro may become more attractive from a Greek perspective. 
An interesting development which seems to have mostly slipped under the radar then. We wouldn’t be surprised to see the eurozone and Greek leaders take advantage of this opportunity to gain a large reduction in the superficial figures on Greek debt – it would make for an effective headline figure and would likely buy them some more time in terms of making Greek debt look sustainable in their and the IMF's models. Ultimately, though, it would only be window dressing, further shifting of funds around to try to make the situation seem better than it is. In the end, as we have always said, there are no easy answers to the Greek or eurozone crisis.


Rik said...

Two remarks:

1. This is a complete waist of time.
Greece is bust and so will be its banks. It hardly matters from the debtorside if you are 3 or 4 times bust.
And from the creditors side it hardly matters if you not get your money back from banks or from the country.
The only thing that can keep Greece from bankruptcy is massive transfers and over a very long time probably more or less indefinitely and that is a different ballgame.

2. You donot understand a thing about financial markets on this point.
It is the whole picture of which debt is just one point. If Germany can afford 100+% doesnot implicate that France can do the same. That France can likely afford 100% (just yet)doesnot mean Greece can do the same.
Greece would likely be bust if it now had 50% debt it is likely to be seen as a EM may be 3rd world debtor. Were it not for the EZ assistance.

Open Europe blog team said...


Thanks for the comments. As we say, we agree that this will make no difference for Greece, purely a cosmetic adjustment. We were simply suggesting that it may be used by the eurozone to argue that Greek debt has become more sustainable when it obviously would not have been. In terms of the debt to GDP level, maybe we should have phrased it as '136% debt to GDP is still an unsustainable debt level for Greece', although that's not to rule out that lower levels may also not be sustainable.

Rik said...

These kind of discussions (on a political level of course) waist simply without any positives certainly not directly a lot of time and public credit.
Credit in the way that any Greek thing that needs approval at national level gives a really bad PR for the whole rescue with the public and simply increases the chance that with a next step something goes wrong.
It also shows markets they simply have not their eyes on the ball.

I donot like it mainly because I donot like clumsy management of things.
However from a wider perspective a shock event will be necessary to make people do the things they have to do (massive structural reform in the PIIGS and in the EZ set up (make the rules work, get countries out that spoil things or close the joint)).
So in that respect, the more trouble the better. This will not be solved by time, not get away, so better attack the problem in a proper way and asap. The trouble will happen anyway. A shock might speed up that process.

Rik said...

Looking at the EZ basically all PIIGS are long term uncreditworthy.
Italy and Spain are kept alive by the (possible) EZ/ECB intervention(s).
Ireland in a rescue/bail lot, it is likely the country with the most potential to get out.
Portugal simply needs a huge drop in costs (read wages read living standard). Spain basically as well, btw.
Greece is simply bankrupt.

I doubt that in future markets will allow these countries to borrow these kinds of percentages
we have seen now. At least internationally (in all sectors, government, business, private and financial).
Which means things like less chance of a bubble. Less room for a future stimulus etc.

The problem with the Southern PIIGS is imho as well that they have come into the bracket of countries that basically are not 'good' enough to have own brands, new technical stuff and other goods with pricing power. And that is by far the most competitive part of the world market. And works at much lower wages.

Starting from there and seen the present troubles probably the max countries can borrow at more or less normal conditions will be something like this.
For Greece at this moment basically nearly nothing. Even if all debt was wiped out hardly anybody would lend to them.
May be some locals (but that would be mainly arm twisting). It needs to show it can handle its economy first. Too many mistakes after one you can get away with a good plan after several people demand first concrete proof.
So may be now a few 10s percent 20-30 or so. And if cleaned up with structural reforms in future more EM like say 60.

Portugal less to clean up, shows better management so now may be 50-60 and after cleaning up say 70.

Etc. Problem being democratic and European we are always likely to see mass protests and a lot of entitlements after this is cleaned up. Unless Europe as a whole makes a system change.