Update (Reuters): “Another official confirmed that the financing would total 130 billion euros with the aim of reducing Greece’s debts from around 160 percent of GDP now to 121 percent by 2020, but cautioned that drafting of the deal was only just starting.”
So far tonight, the press conference that was supposed to take place after the Eurozone ministers’ meeting and reveal the details of a fully completed bailout/austerity/PSI agreement has been delayed 3 or 4 times. As I write this, the latest 3:30am dead line is also being missed, as it’s not clear whether there are still discussions continuing or whether a comprehesnive super deal to end the Euro crisis been reached, but all the ministers simply passed out in the conference room and forgot to tell anyone the good news.
The only thing we know so far is that the “debt sustainability analysis” produced by Troika analysts for the meeting has unsurprisingly turned out to be very sobering for the politicians, bureacrats and pundits, since it completely undermines the laughable notion that Greece’s debt will ever be sustainable as it remains in the Eurozone. Peter Spiegel of the Financial Times reports on the “most revealing paragraph” of this 10 page report:
“There are notable risks. Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis. Prolonged financial support on appropriate terms by the official sector may be necessary [not if Germany has anything to say about it, and it does]. Moreover, there is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term.
In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.”
Indeed, it is a revealing paragraph, as the bailout/austerity program’s objectives are expected to “inevitably lead to a higher debt to GDP ratio in the near term” and the worst case scenario envisions Greek debt/GDP reaching 160% in 2020. None of this is really news to our readers – it is just plain common sense. The only thing that remains unknown is how the Eurocrats can possibly manage to justify authorizing further bailout money to Greece when reports such as this one, commissioned by their own analysts, are out in the public for everyone to see. Even if they hold a press conference in the wee hours of the morning with a few words of optimistic spin on the alleged “deal”, it’s hard to imagine that anyone, including the markets, will be able to take them seriously.
Any deal that comes out now will be so riddled with inconsistencies and illusory promises that it can’t last for more than a few days. On the other hand, the markets have seeminly given up on reacting to anything except the most short-term and manipulated headlines out of Europe. Personally, I’m not going to be staying up to find out either way. We’ll see what the morning brings after yet another day of endless discussions in Europe that are bound to destroy that Continent’s last remaining shreds of credibility. In the meantime, for those interested, here’s some of Spiegel’s analysis of the dreadful report (note the part stating that the banks need more money!):
Let’s unpack that paragraph. The “share of senior debt” in the first sentence refers to the fact that, once the bail-out is complete, a vast majority of Greek debt will be held by government entities, like the IMF and the ECB, new private investors will long be afraid of purchasing new bonds even in the distant future, out of fear that in a default government creditors will be made whole before they will.
“Prolonged financial support” is a euphemism that essentially means Greece is going to need bail-out money for the foreseeable future.
The next sentence is where things get really dire. The analysis suggests that the medicine being fed to Greece – trying to drive down wages and costs through austerity measures to make the Greek economy more competitive internationally – will lead to higher debt levels in the near term that may never be overcome.
Section I of the report spells out the “baseline scenario” that finance ministers were using to negotiate during their all-night meeting in Brussels Monday. Here, the economic assumptions seem pretty rosy. In a more detailed chart in the back of the report, the Greek economy is projected to shrink this year by 4.3 per cent, but rebound to flat growth next year and a relatively robust 2.3 per cent in 2014 and 2.9 per cent in 2015.
It also notes that Greek banks, which were originally thought to need €30bn in recapitalisation funds, a figure that was later raised to €40bn, will now likely need €50bn.
Then it goes onto note that the €200bn debt restructuring – which involves €100bn in losses for private investors and is known as “PSI” for “private sector involvement” – may also have unintended consequences by creating a new class of investors. The reasons for this are complex, but essentially those who participate in the deal will get new bonds that are backed by both the eurozone rescue fund, the European Financial Stability Facility, and the Greek government. Such a “co-financing structure” between the EFSF and the Greek government makes the new bonds more secure than any other bonds the Greek government are likely to issue – and thus scare off future private investors.