Greece is creeping back into the news again as slowly as it is creeping AWAY from its necessary financial reforms. Greece’s third bailout program ends this August, and the Eurogroup have demanded a ‘growth strategy’ by April and set 88 legislative tasks for them to complete by the 21st June to qualify for the final round of the €86 billion bailout package. Furthermore Eurozone finance ministers have yet to agree on any sort of medium-term debt relief to help keep Greece ticking over after August – let alone any contentious long-term relief measures. Continued uncertainty over these will make repeating last year’s successful and oversubscribed bond sale increasingly challenging and expensive.
‘Whatever it takes’ - Three words that may have saved the Eurozone… for at least 5 years.
‘All the leaders of the 27 countries of Europe… said that the only way out of this present crisis is to have more Europe, not less Europe. A Europe that is founded on four building blocks: a fiscal union, a financial union, an economic union and a political union… there is more progress than it has been acknowledged… [people] underestimate the amount of political capital that is being invested in the euro… we think the euro is irreversible… Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’
On Sunday the French voters head to the polls for the final round of the French Legislative Elections. The first stage propelled Macron and his La République en Marche (LREM) into a controlling position: they secured 32.3% of the vote including his allies the MoDem party which secured 4.1% of the vote. Projections have been pretty good indicators in France, and the latest Opinionway poll suggests LREM will get between 440 and 470 of the 577 available parliamentary seats. The major casualty of Macron’s success is the Socialists which are projected to only gain 20-30 seats when they had controlled 331 going into the election. The Republicans are expected to get between 70-90 seats.
Ahead of Eurozone finance ministers meeting today in Brussels to discuss Greece’s progress on achieving its bailout conditions, the head of the Eurozone bailout fund Klaus Regling believes that the southern Mediterranean country will need less in the third instalment of emergency loans from international lenders than originally approved. Speaking to the German newspaper Bild Regling said ‘We already have half of the three-year programme behind us and we've paid out nearly EUR32 billion so far’ however he went on to say ‘By the programme's end in August 2018, we'll likely have paid out significantly less than the agreed highest sum of EUR86 billion.’
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.
According to a draft report issued by the International Monetary Fund (IMF), Greece’s government debt could soar to 275% of its gross domestic product (GDP) by 2060, at which time its financing needs will be a massive 62% of GDP, although these figures are disputed by the Greek government's own estimates. Greece believes debt at present is a mere 180% of GDP.
The IMF reports that Greece’s debt and financing needs will be ‘explosive’ in the coming decades unless they can renegotiate the bailout programme with the EU to lighten the load.
Last week we skeptically wrote of the “breakthrough” deal the IMF achieved for Greece with its international creditors; that is to pretend Greece can stave off bankruptcy and extend a further €10.3bn bailout. Bear in mind that with over €320bn public indebtedness and a required yield of 7% on Greek 10 year debt the new bailout funds are just about enough to cover 6 months of interest payments. So all those involved will be hoping for a similar deal again before November this year (and then again in May and November 2017…).
Greece is again in the headlines after international creditors agreed on another bailout package, without which the indebted and struggling economy would have soon seen another default. Yesterday’s 11 hour negotiations have been heralded as another “breakthrough” amidst an impasse of 6 years and counting; as the champions of debt relief (IMF) conceded enough to reach a deal with the restructuring opponents (personified by Germany’s Finance Minister Wolfgang Schauble). Even so the IMF will still have to substantiate that the new arrangements allow Greece to meet its normal lending standards before it participates on further lending alongside the Eurozone.
Over the weekend the G7 finance ministers met in Japan, with most of the headlines focusing on what seems to be a growing spat between the United States and Japan; the two countries are at loggerheads over currency policy. The US has stated that Japan has no justification to intervene in currency markets to stem the strength of the yen, which is having a detrimental effect on Japanese exporters, however the US insists the move has been orderly.
The German word ‘schuld’ means ‘debt’ but it also translates to ‘guilt’ and ‘shame’ and perhaps goes some way to explaining Germany’s more rigid austerity driven approach to Greece and its debt.
Pierre Moscovici, the European Economic Affairs Commissioner, has made it clear that IMF involvement is viewed as essential to the Greek bailout stating “The commission is convinced that we must not do, will not do, without the Fund.” However, the IMF is insistent that for their involvement there has to be a realistic plan making Greece’s liabilities sustainable. The IMF takes issue with the primary budget surplus target (as a percentage of GDP before interest payments) and the lack so far of any form of debt relief. Christine Lagarde stated, “The 3.5% in the short term might be achievable by some heroic, and I really mean heroic, efforts on the part of Greece and the Greek people.” Moreover, “what we find highly unrealistic, on the other hand, is the assumption that this primary surplus of 3.5% can be maintained over decades. That just will not happen.”
Greece is officially back in recession after announcing its second consecutive quarter of negative growth; Q4’15 growth fell 0.6% qoq and growth for Q3 was revised down to -1.4% qoq from -0.9%. As the assessment of Greece’s compliance with the latest 2015 bailout package reforms takes place (to release further funds) this raises a number of issues.