Greek 2 year bonds touched yields of 9.5% yesterday on the back of a disenchanting report from the IMF which has revived a dispute between the IMF and EU creditors. Europe and markets generally have continued to assume that the IMF would eventually join the third bailout programme for Greece which for the last three years has fallen solely to the European Stability Mechanism (ESM). The IMF was meant to have decided on their participation by end 2016 but continue to abstain whilst arguing for a 1.5% primary surplus – rather than an “unrealistic” 3.5% target by 2018 as demanded by the European Commission – which would necessitate significant debt relief from other Eurozone countries.
With €7bn of debt due in just 5 months another bailout will need to be reached before then and this latest spat clearly makes this more difficult; bear in mind just how little consensus has been reached in the past 2 years of negotiations. German officials have warned that without the IMF the entire rescue programme would be axed. With government debts already at 180% of GDP the IMF forecast that this debt load would turn “explosive” after 2022.
Those disputing IMF’s concerns say they have yet to fully factor the most recent improvements in the Greek economy which have been notable on the back of increased tax revenue and expectations that the economy will grow above 2% this year for the first time in a decade; that is of course after real output dropping by over a quarter since the crisis and having ebbed at this nadir for past 2 years. This decline is as deep as the US Great Depression but with the unfortunate comparison that back in the 30s even the US had recovered in terms of productivity within 7 years, as did the Asian economies in 4 years following the Asian Crisis of 97. Greece is of course already 8 years on, so many hope it is about time for some recovery. But just because its economy has stopped shrinking does not give proper cause to believe it is assured a long term trend of growth. There are few promising opportunities on the horizon for Greece in the face of unemployment, depressed domestic spending, global secular stagnation and little in terms of policy in the pipeline that would be a boost.
One of the issues again being discussed is the risk of redenomination of Greek debts is the case of a Grexit and reinstated drachma. This of course would no longer be the preferred option for Greece itself (perhaps regaining monetary sovereignty in order to inflate debts away would have been the best option back in 2010 but that opportunity was missed). As numerous as the concerns are for Greece this is perhaps less of a concern for Greek international debt which mostly follows English law. So if the European Project does fall apart at least those holding Greek debt would get whatever funds they can recover back in euros. We of course remain aversive to almost all European government debt either for lack of value or excessive and under-priced risk. A decade ago when Greece was still A1 rated and could borrow at 1% for 2 year and 4% for 10 year debt we were warning of their excessive Net Foreign Debts. Following adoption of the euro Greek debts ballooned – lured by markets wrongly associating the various euro denominated government debts.