The Eurogroup meets on Monday for the third time in as many weeks to discuss Greece’s finances. Maybe third time’s the charm?
The focus remains on getting an agreement on the country’s medium-term debt sustainability. The reason for that is two-fold. First, it’s necessary to appease the IMF given its insistence on a haircut (which is politically very difficult for many of the member countries). Second, with the German elections taking place next September, it’s seen as best for all concerned to agree some sort of solution that will allow the question of Greece’s longer-term sustainability to be ignored until late 2013.
More immediate financing needs are likely to be addressed with a higher T-bill issuance. In any case, a deal needs to be struck before Greece’s €5.4bn debt redemption on December 14th, if a default is to be avoided.
David Mackie at JP Morgan thinks there’s room for some optimism:
The Euro group could reach a decision today if it is prepared to do a bit of everything.
By that he means: if they’re prepared to reduce borrowing costs, buy back some debt and so on.
The below table shows the impact of three changes to the Greek financing situation: a 90bps reduction on the borrowing costs on the Greek loan facility, a €14bn EFSF loan to buy back €35bn of market debt, and the transfer of SMP profits to Greece.
In this scenario, Greek debt is projected to be 130.6 per cent of GDP in 2020 and 115.4 per cent in 2022. This is still some way off the Troika’s target of 120 per cent by 2020.
Joerg Asmussen told Germany’s Bild on Sunday that a deal incorporating the measures above could be reached on Monday. From Reuters:
“We need a package of measures to close the financial gap that will include a substantial reduction of the interest rates and a debt buy-back by Greece,” Asmussen said in an interview to appear on Monday. “A hair cut does not belong to that package.”
If none of the above changes are made, Mackie projects Greek debt to be 147.9 per cent of GDP in 2020 and 135.2 per cent in 2022, as per the table below:
But even if a deal can be struck to keep the IMF on board and to allow the next tranche of funds to be released, massive hurdles remain. Back to Mackie:
The big question of a restructuring of official loans will still need to be answered at some point in the future. The debt dynamics in the tables [above] still assume ambitious fiscal numbers for Greece and solid nominal GDP growth. Greece is assumed to be able to run a primary surplus of 4.5% of GDP on an indefinite basis, and nominal GDP growth is assumed to average over 4%.
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