Brussels, 22/04/2014 (Agence Europe) - On Wednesday 23 April, the EU's statistical office, Eurostat, will supply Greece with the hefty arguments it needs to enter debt reduction talks with Europe on a strong footing. Eurostat will formally confirm the country's primary budget surplus (not including debt servicing costs) for 2013, which was set in November 2012 as the precondition for any debt reduction in order to help Greece reduce its debt to 124% of GDP in 2020. According to the official figures for 2013, 60% of the Greek debt is held by the eurozone.
Greece's public debt is expected to reach 177% of GDP this year, or around the €320 billion mark. For more than a year now, the international Monetary Fund has been warning that such a colossal debt can frighten off investors and if this were to happen in Greece, the IMF notes in a monitoring report in July 2013 that “should debt sustainability concerns prove to be weighing on investors sentiment even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed” (see EUROPE 10900). It notes that the current planned debt reduction trajectory will require new measures to lead to a further reduction of 4% of GDP by 2020, measures to be decided upon in 2014 or 2015.
A few weeks ago, the head of Eurogroup, Jeroen Dijsselbloem, said in an interview with French newspaper Le Figaro that it was an established and continuous principle that when one country lends to the other, it has to be reimbursed. He pointed out that if Europe were to decide on a write-down of Greek bonds, then investors might think twice before they lend to the country (see EUROPE 10886). Investors, however, had no hesitation to jump at the five-year Greek bonds put on sale on 10 April, the first five-year bond issuance since Greece was bailed out in May 2010. Demand was a massive seven times higher than supply.
The wrong target. Analysts say that aiming at a specific debt/GDP ratio for a specific point in the future makes no sense. It ca be argued that some of the characteristics of the Greek public debt make it unique in the eurozone and numbers like the debt/GDP ratio do not do justice to it. What is different about Greece is the average maturity of the debt (18 years, apart from Treasury bonds), along with the reduced cost of debt-servicing. In addition, there is limited debt-servicing over the next eight years (around €6 billion on a uniform, gradua basis). Finally, the structure of the debt and its high concentration in the hands of the public sector (80% of the total in 2013) could suffice as a guarantee for investors. On umpteen occasions, eurozone leaders have said that if push came to shove, the eurozone would pay Greece's arrears, as long as it sticks to its commitments.
Analysts therefore suggest that the risks surrounding Greek debt should be assessed in terms of the cost of servicing the debt rather than the debt/GDP ratio in six or eight years' time, in other words in 2020 or 2022. The analysis should include the risk of insolvency, the risk of liquidity and the refinancing risk. It is estimated that after debt restructuring, the first two risks would be manageable and extending the maturity of the loans to 50 years from the current 30 would remove the third risk. Purely writing off some of the debt is therefore not considered the most efficient solution.
From the political viewpoint, the question should not even arise because of the well-reported reluctance of Germany to countenance a writedown. Greek finance minister Yannis Stournaras is quoted in the British business newspaper, The Financial Times, in January as saying that despite pressure from the IMF on Germany to write off some of Greece's debt, German finance minister Wolfgang Schäuble told him: “Yannis, just forget it”(see EUROPE 10994).
Greece is anxious not to be labelled a bad-payer and does not seem to be asking for a writedown. In January, when unveiling the Greek Presidency of the EU's plans for its six months in office, deputy Greek prime minister Evangelos Venizelos said Greece wasn't living on the back of its partners and nobody would come out the loser. Soon afterwards, finance minister Stournaras told MEPs in Brussels that there was a “win-win” solution for all parties (see EUROPE 11003).
One of the one-off measures that might be requested is a direct, retroactive recapitalisation of Greek banks by the European Stability Mechanism (ESM) once the European Central Bank starts up as the eurozone's bank supervisory body in November. In an interview with this newsletter in May 2013, Stournaras said that this would be “fair” for Greek banks (see EUROPE 10847). Greece feels that the measure is still an option. The ESM would buy up some of the debt contracted by the state in order to recapitalise the banks. The banks would then owe the money to the ESM directly, reducing the burden on the state. “A retroactive recap is unlikely,” commented a eurozone source. Quizzed by Irish reporters in December 2013, the head of the ESM, Klaus Regling, said that the option of direct recapitalisation from the ESM would be possible on a case-by-case basis and would require a unanimous vote. He said that his personal impression was that there is little appetite for such a move.
Three options are on the table. The eurozone will need to put its money where its mouth is because it has been saying for months now that a reduction in interest rates on the loans to Greece, an extension of the reimbursement deadlines or a future reduction in national co-financing rates for projects backed by the EU Structural Funds are all possible. The first option, reducing the interest rates on the loans from the eurozone's temporary bailout fund, the EFSF, under the second Greek bailout, is hard to imagine. Regling says interest rates have already been reduced the lowest possible level, around 1.5%. He said member states had no appetite for reducing the interest rate still further and thus in effect making a payment to Greece. What about the bilateral loans as part of the first bailout? Some creditor countries may have room for manoeuvre to reduce interest rates, but not by much, he said, because they have to roll over their own debt too. It would be hard to expect Italy or Spain to reduce the interest rates on their loans, because that would multiply their own financing costs. Regling said that there was margin for extending the maturity of the loans, but that was for the countries themselves to decide. The ECB will not make any gesture for the Greek bonds it owns because it does not want to be accused of providing monetary financing, which is not allowed under the treaties. That leaves the final option, extending the maturity of the EFSF loans, currently set at 30 years. It is said that they could go up to 50 years.
The third option would not be the easiest option for Greece politically-speaking, because it will be interpreted as another “debt crisis” on top of the debt crisis that has been rumbling on for years now, in a country where budget belt-tightening has been unprecedented. This could be exacerbated by the fact that the troika of lenders (the European Commission, the ECB and the IMF) would continue to have control over the country for even longer - until it has paid back 75% of its loans. Some in Athens say, however, that it makes little difference in a way if it's 30 years or 50 to pay back the debt. The eurozone says that what politicians in Athens say is secondary because it is the lenders who will decide.
Another tricky issue is the timetable. In July 2013 Dijsselbloem, promised that debt-reduction talks would begin in April 2014, but more recently he said they would start in August (see EUROPE 11021). The eurozone is said to be stringing things out as a way of putting pressure on Greece, which wants the talks to take place before the European elections. Here, the OECD is on the side of Greece, saying that the decision needs to be taken as soon as possible (see EUROPE 10973). The Greek media report that the question might be tabled by the Greek finance minister for the Eurogroup meeting in early May. Greece fears that the question is put on the back burner until the new European Commission comes to power in October. Dijsselbloem's circles say “There's no rush.” The EPP candidate to become the president of the European Commission (and former head of Eurogroup), Jean-Claude Juncker, said in an interview with this newsletter last week that he would be going to Greece at the start of May for talks with the Greek prime minister on the next stages and measures to be taken as president of the European Commission (see EUROPE 11062). But even if Juncker is selected to replace José Manuel Barroso, he would not take up office until November.
Deflation and disappointing returns from privatisation. Faced with a sustained period of low inflation in the eurozone (0.7% in February, 0.5% in March), analysts says that deflation is a risk for the debt burden of “peripheral” countries. In the case of Greece, there are factors that mitigate the risk because the fall in prices matches the fall in real income and helps make the economy more competitive. Deflation in Greece is due to the colossal slashing of public spending and the slump in domestic demand, which are both becoming stabilised. Moreover, although the structural reforms on the product market are generating deflationary pressure in the short-term, they are expected to boost competitiveness and will protect against deflation in the long-term.
The IMF says that privatisation is the Greek programme's Achilles' heel, but it has less impact on debt than lack-lustre growth or mediocre budget performance. The troika's analysis of the Greek debt reduction trajectory presupposes that the country will be able to maintain a primary annual budget surplus of 4% of GDP from 2016 onwards, which the IMF describes as “ambitious.” If the Greek growth trajectory deviates by one percent from 2013 onwards, then public debt could rise to 134% of GDP in 2020 before starting to slowly decline. Finally, if the privatisation programme nets half of the expected €22 billion by 2020, then the debt would only overshoot the 2020 target by 4%.
On Friday, the European Commission will publish its report on the troika's fourth monitoring mission in Greece, nearly nine months after its previous such report. Its analysis of the viability of the Greek debt is not expected to be very different from its analysis in July 2013. (EL)