Showing posts with label Greek debt. Show all posts
Showing posts with label Greek debt. Show all posts

Tuesday, May 23, 2017

22/5/17: Eurogroup and Greece: Wrestling Defeat from the Claws of Victory


Today's Eurogroup meeting on Greece ended in no agreement and extends the current tranche negotiations into June 15, the date of the next Eurogroup meeting.

For the background:

The key sticking point so far is the scheduling of future primary surpluses (budgetary surplus before the debt servicing costs are factored in). The Eurogroup insists on these surpluses running at 3.5% of Greek GDP for the first 5 years following 2018, declining to 2% or 2.2% (depending on the version of the draft agreement) for 2023-2060. 

In very simple terms, such commitments are absolutely bogus (and dangerous). They are bogus because there is absolutely no way anyone can project growth rates out to 2060 from today that can be in any way reasonably accurate to predict primary surpluses. They are dangerous, because they will shackle Greek governments to running buffer funds to compensate for possible recessionary and non-cyclical shocks to the primary surpluses. These buffers will imply underinvestment within the Greek economy (public investment) over the long term. Which, of course, will damage the Greek economy and increase the risk of non-compliance with the deficit rules.

Here is how unrealistic the current proposed targets are. Consider, first, IMF projections (April 2017 data) for primary surpluses over the next 5 years (2018-2022). Remember, Greek target (grey line) is 3.5% for that period:

With exception of Italy, no other advanced euro area economy comes even close to the proposed target. And no one is making a case that Italy running these surpluses is somehow consistent with structurally strong growth expectations over the period.

Now, consider past and present performance, based on 10 years windows. For 10 years window, Greek target surplus is 2.85% per annum:

The view is a bit brighter. 

In the 1990s, two countries managed to run surpluses at or above the target set for Greece forward: Belgium and Ireland. Both countries were recovering from substantial fiscal crises of the late 1980s-early 1990s.  But, unlike Greece today, both countries benefited from exogenous shocks that boosted significantly their surpluses and growth: Belgium gained substantial income transfers from growth of the EU institutions, and Ireland gained from a large scale FDI boom. Neither country needed to run large scale public investment programmes financed from own (internally-generated) funds. 

In the 2000s, Belgium continued to run large surpluses and it was joined in this by Finland. Belgium surpluses drivers remained the same, while Finland carried out substantial fiscal consolidation in the wake of the early 1990s crisis timed perfectly to coincide with rapid economic growth in the economy. 

In simple terms, no advanced euro area economy has managed to run surpluses expected of Greece at the times of adverse economic growth conditions or immediately after a major recession.

As I noted in the earlier post on the Greek economy (see http://trueeconomics.blogspot.com/2017/05/18717-greece-in-recession-again.html), the state of Greek economy has been so highly uncertain over the last few years, that any projections 3-4 years out from today are simply an example of a delirious wish-for-thinking. In this environment, setting targets out to 2060 is absurd, and dangerous, for it commits Greece to targets that may or may not be to the benefit of the Greek economy and sets up the euro area fiscal policy architecture for a failure at the altar of extreme conviction in technocratic targeting. 

Wednesday, May 25, 2016

25/5/16: IMF's Epic Flip Flopping on Greece


IMF published the full Transcript of a Conference Call on Greece from Wednesday, May 25, 2016 (see: http://www.imf.org/external/np/tr/2016/tr052516.htm). And it is simply bizarre.

Let me quote here from the transcript (quotes in black italics) against quotes from the Eurogroup statement last night (available here: Eurogroup statement link) marked with blue text in italics. Emphasis in bold is mine

On debt, I certainly think that we have made progress, Europe is making progress. Debt relief is firmly on the agenda now. Our European partners and all the other stakeholders all now recognize that Greece debt is unsustainable, is highly unsustainable, they accept that debt relief is needed.

Do they? Let’s take a look at the Eurogroup official statement:

Is debt relief firmly on the agenda and does Eurogroup 'accept that debt relief is needed'? "The Eurogroup agrees to assess debt sustainability" Note: the Eurogroup did not agree to deliver debt relief, but simply to assess it. Which might put debt relief on the agenda, but it is hardly a meaningful commitment, as similar promises were made before, not only for Greece, but also for other peripheral states.

Does Eurogroup "recognize that Greece debt is unsustainable, is highly unsustainable"? No. There is no mentioning of words 'unsustainable' or 'highly unsustainable' in the Eurogroup document. None. Nada. Instead, here is what the Eurogroup says about the extent of Greek debt sustainability: "The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments." Does this sound to you like the Eurogroup recognized 'highly unsustainable' nature of Greek debt? Not to me...

Furthermore, relating to debt relief measures, the Eurogroup notes: “For the medium term, the Eurogroup expects to implement a possible second set of measures following the successful implementation of the ESM programme. These measures will be implemented if an update of the debt sustainability analysis produced by the institutions at the end of the programme shows they are needed to meet the agreed GFN benchmark, subject to a positive assessment from the institutions and the Eurogroup on programme implementation.” Again, there is no admission by the Eurogroup of unsustainable nature of Greek debt, and in fact there is a statement that only 'if' debt is deemed to be unsustainable at the medium-term future, then debt relief measures can be contemplated as possible. This neither amounts to (1) statement that does not agree with the IMF assertion that the Eurogroup realizes unsustainable nature of Greek debt burden; and (2) statement that does not agree with the IMF assertion that the Eurogroup put debt relief 'firmly on the table'.

More per IMF: Eurogroup “…accept the methodology that should be used to calibrate the necessary debt relief. They accept the objectives in terms of the gross financing need in the near term and in the long run. They even accept the time periods, a very long time period, over which this debt has to be met through 2060. And I think they are also beginning to accept more realism in the assumption.

Again, do they? Let’s go back to the Eurogroup statement: “The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments.” Have the Eurogroup accepted IMF’s assumptions? No. It simply said that things might change and if they do, well, then we’ll get back to you.

Things get worse from there on.

IMF: “We have not changed our view on how the outlook for debt is looking. We have not gone back. We want to assure you that we will not want big primary surpluses.” This statement, of course, refers to the IMF stating (see here) that Greek primary surpluses of 3.5% assumed under the DSA for Bailout 3.0 were unrealistic. And yet, quoting the Eurogroup document: the new agreement “provides further reassurances that Greece will meet the primary surplus targets of the ESM programme (3.5% of GDP in the medium-term), without prejudice to the obligations of Greece under the SGP and the Fiscal Compact.”  So, IMF says it did not surrender on 3.5% primary surplus for Greece being unrealistic, yet Eurogroup says 3.5% target is here to stay. Who’s spinning what?

IMF: “...I cannot see us facing this on a primary surplus that is above 1.5 [ percent of GDP]. I know it's just not credible in our view. And you will see that there is nothing in the European statement anymore that says 3.5 should be used for the DSA. So there, too, Europe is moving.” As I just quoted from the eurogroup statement clearly saying 3.5% surplus is staying.

IMF is again tangled up in long tales of courage played against short strides to surrender. PR balancing, face-savings, twisting, turning, obscuring… you name it, the IMF got it going here.



24/5/16: Greek Crisis: Old Can, Old Foot, New Flight


So Eurogroup has hammered out yet another 'breakthrough deal' with Greece, not even 12 months after the previous 'breakthrough deal' was hammered out in August 2015. And there are no modalities to discuss at this stage, but here's what we know:

  1. IMF is on board. Tsipras lost the insane target of getting rid of the Fund; and Europe gained an insane stamp of approval that Greece remains within the IMF programme. Why is this important for Europe? Because everyone - from the Greeks to the Eurocrats to the insane asylum patients - knows that Greece is insolvent and that any deal absent massive upfront commitments to debt writedowns is not sustainable. However, if the IMF joins the group of the reality deniers, then at least pro forma there is a claim of sustainability to be had. Europe is not about achieving real solutions. It is about propping up the PR facade.
  2. With the IMF on board we can assume one of two things: either the deal is more realistic and closer to being in tune with Greek needs (see modalities here: http://trueeconomics.blogspot.com/2016/05/23516-debt-greek-sustainability-and.html) or IMF once again aligned itself with the EU as a face-saving exercise. The Fund, like Brussels, has a strong incentive to extend and pretend the Greek problem: if the Fund walks away from the new 'breakthrough deal', it will validate the argument that IMF lending to Greece was a major error. The proverbial egg hits the IMF's face. If the Fund were to stay in the deal, even if the EU does not deliver on any of its promises on debt relief, the IMF will retain a right to say: "Look, we warned everyone. EU promised, but did not deliver. So Greek failure is not our fault." To figure out which happened, we will need to see deal modalities.
  3. What we do know is that Greece will be able to meet its scheduled repayments to EFSF and ECB and the IMF this year, thanks to the 'breakthrough'. In other words, Greece will be given already promised loans (Bailout 3.0 agreed in 2015) so it can pay back previous extended loans (Bailouts 1.0 & 2.0). There are no 'new funds' - just new credit card to repay previous credit card. Worse, Greece will be given the money in tranches, so as to ensure that Tsipras does not decide to use 'new-old' credit on things like hospitals supplies. 
  4. Greece is to get some debt reprofiling before 2018 - one can only speculate what this means, but Eurogroup pressie suggested that it will be in the form of changing debt maturities. There are two big peaks of redemptions coming in 2017-2019, which can be smoothed out by loading some of that debt into 2020 and 2021. See chart below. Tricky bit is the Treasury notes which come due within the year window of maturity and will cause some hardship in smoothing other debts maturities. However, this measure is unlikely to be of significant benefit in terms of overall debt sustainability. Again, as I note here: http://trueeconomics.blogspot.com/2016/05/23516-debt-greek-sustainability-and.html Greece requires tens of billions in writeoffs (and that is in NPV terms).
  5. All potentially significant measures on debt relief are delayed until post-2018 to appease Germany and a number of other member states. Which means one simple thing: by mid-2018 we will be in yet another Greek crisis. And by the end of 2018, no one in Europe will give a diddly squat about Greece, its debt and the sustainability of that debt because, or so the hope goes, general recovery from the acute crisis will be over by then and Europeans will slip back into the slumber of 1.5 percent growth with 1.2 percent inflation and 8-9 percent unemployment, where everyone is happy and Greece is, predictably, boringly and expectedly bankrupt.

Source: http://graphics.wsj.com/greece-debt-timeline/

Funny thing: Greece is currently illiquid, the financing deal is expected to be 'more than' EUR10 billion. Greek debt maturity from June 1 through December 31 is around EUR17.8 billion. Spot the problem? How much more than EUR10 billion it will be? Ugh?..So technically, Greece got money to cover money it got before and it is not enough to cover all the money it got before, so it looks like Greece is out of money already, after getting money.

As usual, we have can, foot, kick... the thing flies. And as always, not far enough. Pre-book your seats for the next Greek Crisis, coming up around 2018, if not before.

Or more accurately, the dead-beaten can sort of flies. 

Remember IMF saying 3.5% surplus was fiction for Greece? Well, here's the EU statement: "Greece will meet the primary surplus targets of the ESM programme (3.5% of GDP in the medium-term), without prejudice to the obligations of Greece under the SGP and the Fiscal Compact." No,  I have no idea how exactly it is that the IMF agreed to that.

And if you thought I was kidding that Greece was getting money solely to repay debts due, I was not: "The second tranche under the ESM programme amounting to EUR 10.3 bn will be disbursed to Greece in several disbursements, starting with a first disbursement in June (EUR 7.5 bn) to cover debt servicing needs and to allow a clearance of an initial part of arrears as a means to support the real economy." So no money for hospitals, folks. Bugger off to the corner and sit there.

And guess what: there won't be any money coming up for the 'real economy' as: "The subsequent disbursements to be used for arrears clearance and further debt servicing needs will be made after the summer." This is from the official Eurogroup statement.

Here's what the IMF got: "The Eurogroup agrees to assess debt sustainability with reference to the following benchmark for gross financing needs (GFN): under the baseline scenario, GFN should remain below 15% of GDP during the post programme period for the medium term, and below 20% of GDP thereafter." So the framework changed, and a target got more realistic, but... there is still no real commitment - just a promise to assess debt sustainability at some point in time. Whenever it comes. In whatever shape it may be.

Short term measures, as noted above, are barely a nod to the need for debt writedowns: "Smoothening the EFSF repayment profile under the current weighted average maturity: Use EFSF/ESM diversified funding strategy to reduce interest rate risk without incurring any additional costs for former programme countries; Waiver of the step-up interest rate margin related to the debt buy-back tranche of the 2nd Greek programme for the year 2017". So no, there is no real debt relief. Just limited re-loading of debt and slight re-pricing to reflect current funding conditions. 

Medium term measures are also not quite impressive and amount to more of the same short term measures being continued, conditionally, and 'possible' - stress that word 'possible', for they might turn out to be impossible too.

Yep. Can + foot + some air... ah, good thing Europe is so consistent... 

Wednesday, July 22, 2015

22/7/15: Paging from the Planet Debt...


Ah, good old Europe... Austerity, Reforms, Structural Changes, Improved Competitiveness, Return to Growth... and rising, rising, rising debt.

Per latest Eurostat release (see here), euro area Government debt/GDP levels have hit 92.9% of GDP in 1Q 2015, up on 92.0% in 4Q 2014 and up on 91.9% of GDP in 1Q 2014. Year on year, Government debt rose from EUR9.179 trillion to EUR9.433 trillion.


Of the five most indebted (fiscally_ economies (excluding Ireland, which did not report 1Q 2015 GDP figures):

  • Debt fell in the case of Greece by 8.3 percentage points between 4Q 2014 and 1Q 2015 to 168.8% of GDP; 
  • Debt rose in the case of Italy by 3 percentage points to 135.1% of GDP;
  • Debt fell 0.6 percentage points in Portugal to 129.6% of GDP;
  • Debt rose 4.5 percentage points in Belgium to 111.0% of GDP;
  • Debt fell 0.7 percentage points in Cyprus to 106.8% of GDP.

Italian debt is now at the highest level since the peak of Inter-war period in the 1920s:


Source: @Schuldensuehner 

Congratulations to the inhabitants of the Planet Debt...



Monday, July 20, 2015

20/7/15: Greece clears IMF arrears. Almost broke, again.


Having borrowed EUR7.2bn, Greece promptly settled its arrears with the IMF (EUR1.996 billion at exchange rates of June-July, but closer to EUR2.05bn in current rates), opening up the way to pay on maturing EUR3.492 billion ECB and NCBs funds today.


Have a new credit card? Will travel… for now… but only for now, as with today's payments we have less than EUR2 billion credit line remaining available for the country.

Next stop: see here http://graphics.wsj.com/greece-debt-timeline/.

Meanwhile, banks reopening - overhyped on both sides (by the mainstream media as a non-event (re: no mayhem) and by alternative media as a run-waiting-to-happen (re: mayhem)) - came relatively calmly, as banks remain under severe capital controls, limiting withdrawals to EUR420 per person per week. On top of which, checks are cashed only into bank account (no cash); withdrawals abroad and money transfers abroad are not allowed, even on pre-paid cards; limits placed on use of credit and debit cards abroad; no new savings or deposits accounts can be opened; repayments of loans can only be done in line with scheduled payments (no advanced repayments possible except by using cash or transfers from abroad); only unrestricted payments are for tax purposes, social security or bank liabilities payments, plus payments to hospitals and for education.

Any wonder there were no bank runs today? Ah, sure, who would run on an open bank with no cash in it? A taxman?..

But coming back to those bridge finance funds. The EU is now saying the Bailout 3.0 will take 6-8 weeks to agree and structure. There is EUR3.188 billion worth of ECB maturities coming up in 5 weeks, EUR1.344 billion of IMF loans due in September, and EUR3.8 billion worth of short term bonds maturing before 8 weeks runs out. Which begs a question: where will Greece get the money to cover these liabilities?

Friday, June 26, 2015

26/6/15: Grexit and European Banks


In the tropical heat of #Grexit, which banks get sweats, which get chills? Two charts via @Schuldensuehner :

and
Note increased (speculative) exposures at Deutsche and Barclays, RBS and Commerzbank... which kinda jars with the conventional wisdom of uniformly reduced exposures. Total end of 2014 exposures were at USD44.5 billion, which is basically marginally down on Q4 2012-Q4 2014 period.

You can see pre-crisis debt flows within the Euro area here: http://trueeconomics.blogspot.ie/2014/12/27122014-geography-of-euro-area-debt.html.

Tuesday, June 2, 2015

2/6/15: Greece: Back to the [Groundhog Day] Future


Couple of weeks back I posted a detailed list of ECB ELA hikes since February 2015. So here's an updated table:

- Feb 5, 2015 = EUR59.5 bn
- Feb 12, 2015 = EUR65.0bn
- Feb 18, 2015 = EUR68.3 bn
- Mar 5, 2015 = EUR68.8bn
- Mar 12, 2015 = EUR69.4bn
- Mar 18, 2015 = EUR69.8bn
- Mar 25, 2015 = EUR71.0bn
- Apr 1, 2015 = EUR71.7bn
- Apr 9, 2015 = EUR73.2bn
- Apr 14, 2015 = EUR74bn
- Apr 22, 2015 = EUR75.5bn
- Apr 29, 2015 = EUR76.9bn
- May 6, 2015 = EUR78.9bn
- May 12, 2015 = EUR80.0bn
- May 21, 2015 = EUR80.2bn
- May 27, 2015 = EUR80.2bn
- Jun 2, 2015 = EUR80.7bn

Now, that implies 3 weeks cumulative ELA rises of EUR700mln and reserve cushion on ELA below EUR2.5bn by my estimate. And for all that, Greek Central Bank recoverable assets are currently at EUR41 billion. Ugh… Oh… the proverbial nose is tightening… but on who's neck?

The neck is somewhere in here - within the Greek Target 2 liabilities debate, liabilities that continue to rise, prompting a fine, but esoteric debate:


I side with Karl Whelan on this. What is material is Sinn's assertion that the Greek residents' "stock of money sent abroad and held in cash having already ballooned to 79% of GDP". And Greece is facing big bills on debt redemptions and wages and pensions in the next 3 months (see timeline here: http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) or:


One thing is clear from all of this: Credit Swiss estimate of 75% chance of a deal being done this month on Greek 'programme', while the CDS markets are pricing in 75% probability of Greek default over the next 5 years:


And we have equally conflicting 'proposals' on how such  programme might be arranged: http://www.zerohedge.com/news/2015-06-02/greece-troika-submit-conflicting-eleventh-hour-deal-proposals which can be summarised as "the bottom line seems to be that, fed up Syriza's unwillingness to concede its election mandate, the troika will now write the agreement for Greece and Tsipras can either sign it or not. Apparently, the IMF has scaled back its demands for EU creditor writedowns (another loss for Athens) but remains skeptical of the entire undertaking."

If this is true, the entire 'new deal' being offered to Greece amounts to a new can being kicked down the same road.

Map of the road? [note: the below table excludes short-term debt]

h/t to @NChildersMEP 

So to sum up today on the Greek front:

  1. ELA is running tight, just as deposit flights goes on;
  2. Target 2 liabilities continue to mount;
  3. Probability of default remains material at present;
  4. Choices available to Greek authorities are Plan A: horrible and Plan B: terrible; and
  5. Absent debt write down, even the best case scenario still leads to high risk of a political crisis in the short run and a default in the medium (3 years) term. 
It's Back to the Future, in a Groundhog Day-like sorts of the Future...

Wednesday, May 6, 2015

6/5/15: Crunch Time in Greece: Day -t or -t-1


Just as Greece barely made today's payment of EUR200 million to the IMF (there's much more coming up - http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) even if only by not paying its own internal bills (http://businessetc.thejournal.ie/greek-debt-crisis-update-2087392-May2015/), the ECB continued to pretend that all is fine in the solvent world of Greek banks. As there exult, the ECB hiked Greek ELA by another EUR2 billion to EUR78.9 billion, which means that some 60% of Greek deposits are now covered out of ELA.

Per FT report (http://www.ft.com/intl/fastft/319051/ecb-mulls-tougher-greek-lending-rules), the ECB's governing council discussed whether "to impose tougher haircuts on the collateral Greek lenders are using to secure emergency loans from Greece's central bank. The council …voted against raising the haircuts, but is likely to revisit the issue should Monday's Eurogroup meeting of eurozone finance ministers disappoint." Which means that should the Greeks continue to play hard ball with the Eurogroup, the ECB can raise collateral requirements on ELA and force Greek banks into panic search for new collateral eligible to be pawned into the ELA.

And while the Greek savers continue to hold deposits in Greek banks - yes, clear evidence of infinite irrationality of retail investors - currency dealers are cutting credit lines extended to Greek banks for trading in forex markets (http://www.bloomberg.com/news/articles/2015-05-06/greece-s-banks-said-to-face-curbs-to-foreign-exchange-trading-i9d1an9v). That's because the Eurosystem et al can fool some of the people some of the time (depositors for now) but can't fool all of the people all of the time.

The whole shift in markets sentiment is not missing on the Credit Default Swaps traders either:



Meanwhile, do recall that Greece is at a risk of running primary deficit in place of primary surplus for 2015: http://trueeconomics.blogspot.ie/2015/05/5515-imf-greece-europe-more-bickering.html (although this FT piece seems to suggest they are not, yet… http://blogs.ft.com/brusselsblog/2015/05/06/is-this-how-greece-is-avoiding-bankruptcy/) and you have a potent cocktail of explosives wired together and the clock's ticking... EUR200 million 'Tick'… EUR800 million 'Tock'… before June EUR1.5 billion 'Kaboom!'

Sunday, April 19, 2015

19/4/15: Greece In or Out: Ifo ain't caring much


Ifo Institute calculated euro system-wide losses from Greek default under two scenarios: Greece remains in the Euro and Greece exits the Euro.



In basic terms, there is no difference between the two.

And alongside that, called for the annual settlement of euro system liabilities and higher cost of funding within the central banks system. Which would trigger Greek default literally overnight and probably make Grexit total inevitability. In effect, thus, Ifo - a very influential German think tank - is calling for shutting the lid on Greece, comprehensively, and crystalising losses across the Eurozone and Eurosystem.

Thursday, April 16, 2015

15/4/15: Official Sector Exposures to Greece


As Greek crisis enters a new turn of the spiral, here are full official sector exposures to Greece by country:
Source: @FGoria 

Wednesday, April 1, 2015

1/4/15: Greek Crisis: Gaining Rhetorical Speed


So Greece is on- off- today in relation to the upcoming repayment of the IMF EUR450 million tranche due April 9. And no, it ain't April Fools Day joke.

Reuters reported as much here: http://mobile.reuters.com/article/idUSB4N0VR02320150401?irpc=932 and a more detailed report is here: http://www.spiegel.de/wirtschaft/soziales/griechenland-will-sich-nicht-an-iwf-zahlungsfrist-halten-a-1026697.html. Subsequently, the claim (made on the record) was denied: http://www.telegraph.co.uk/finance/economics/11509302/Greece-threatens-international-default-without-fresh-bail-out-cash.html

What happens if Greece does go into the arrears via-a-vis the IMF? Here is the IMF position paper on what happens in these cases: http://www.imf.org/external/np/tre/ofo/2001/eng/090501.pdf
And here are the Measures for Prevention/Deterrence of Overdue Financial Obligations to the Fund—Strengthened Timetable of Procedures as tabulated in the above report:



Which means that, in the nutshell, little beyond bureaucratic notifying and meetings takes place within the first 3 months of the breach. Nothing in terms of IMF penalties, that is. The markets, of course, will be a different matter altogether.

Meanwhile, Greece is rolling back on some past 'reforms':


And is planning on asking for more money soon:

This is some sort of a Chicken Game head-on road competition, while dumping petrol on the way... for speed...

Tuesday, January 27, 2015

27/1/15: Greek Debt: Non-Crisis Porkies Flying Around


There is an interesting sense of dramatic contradictions emerging when one considers on the one hand the outcome of the Greek elections, and on the other hand the statements from some EU finance ministers (for example see this: http://www.bloomberg.com/news/2015-01-27/schaeuble-says-greece-needs-no-debt-cut-due-to-no-interest-phase.html). The basic contradiction is that one set of agents - the new Greek government and the Greek electorate - seem to be insisting on the urgency of a debt writedowns, while the other set of agents - majority of the European finance heads - seem to be insisting on the non-urgency of even discussing such.

What's going on?

Here is a neat summary of official (Government) debt redemptions coming up, by the holder of debt (source: @Schuldensuehner):


This clearly, as in daylight clear, shows 2015 as being a massive peak year for redemptions.

Note to the above: GLF debt reference covers GDP-linked bonds - see https://www.diw.de/documents/publikationen/73/diw_01.c.488644.de/diw_econ_bull_2014-09-5.pdf.

Alternative way of looking at the burden of debt is to compare debt dynamics and debt funding costs dynamics. Here these are for Greece, based on IMF data:


Take a look at the above blue line: in effect, this measures the cost of carrying Government debt. This cost did improve, significantly in 2012 and 2013, but has been once again rising in 2014. It is projected to continue to rise into 2019. So Greece can run all the primary surpluses the Troika can demand, the cost of servicing legacy debts is on the upward trend once again and Herr. Schaueble and his ilk are talking tripe.

Now, consider the red line in the chart above: in absolute terms, there is no reduction in Greek debt to-date compared to 2012. But do note the third argument advanced by Herr. Schaueble in the link above, the one that states that Greek debt reductions have exceeded those forecast under the programme. Did they? Chart below shows the reality to be quite different from that claim:


What the chart above shows is that 2015 projections for debt/GDP ratio (the latest being published in october 2014) range quite a bit across different years when forecast was made. Back in October 2010, the IMF predicted 2015 level of debt/GDP ratio to be 133.9%, this rocketed to 165.1% in October 2011 forecast, rose again to 174.0% forecast published in October 2012, declined to 168.6% in forecast published in October 2013 and rose once again in forecast published in October last year to 171% of GDP.  In other words, debt outlook for Greece for 2015 did not improve relative to 3 forecast years and improved only relative to one forecast year. Rather similar case applies to 016 projections and 2017 projections and 2018 projections. So where is that dramatic improvement in debt profile? Ah, nowhere to be seen.

And then again we keep hearing about the fabled end of contagion, 'thank God', that Herr. Schaeuble likes referencing. I wrote about this before, especially about the fact that risk liabilities have not gone away, but were shifted over the years from the shoulders of German banks to the shoulders of German taxpayers. But you don't have to take my word on this, here's a German view: http://www.cesifo-group.de/de/ifoHome/policy/Haftungspegel/Eurozone-countries-exposure.html#losses.

Friday, January 16, 2015

16/1/2015: Where did Greek 'bailout' funds go?


Given the gyrations of the Greek crisis or crises, it might be handy to get a handle on where all the bailout funds extended to Greece have gone. Here are two charts illustrating the said:



Update: source for the charts data: http://www.macropolis.gr/?i=portal.en.the-agora.2080 and my own calculations based on the same.

So in simple terms, Government debt 'solutions' took up 133 billion euros of 'rescue' funds - much of this going to the private sector foreign holders of bonds (PSI) and to private investors in bonds (many foreign) via interest and redemptions. Banks chewed through another 83 billion euros. Total of 81 percent of the funds went to these liabilities.

The fabled Greek deficits (careless spending meme et al) got only 6 percent of the total allocations, of which a small share went to, undoubtedly, support the 'most vulnerable'.

Tuesday, February 11, 2014

11/2/2014: Greek Bailout 3.0 or a Fix 1.4: Ifo Assessment


In light of Bloomberg report on new package of supports for Greece being planned (http://www.bloomberg.com/news/2014-02-05/eu-said-to-weigh-extending-greek-loans-to-50-years.html), German institute Ifo issued a neat summary note.

The core supports being discussed in the EU are: extending term of the loans to 50 years, and lowering the interest cost of loans by 50bps.

Here's a summary via Ifo:

  • As of December 2013 "Greece had received 213.4 billion euros from two bailout packages."
  • First package was May 2010 Greek Loan Facility (GLF) comprising a loan of ca 73 billion euros, disbursed in December 2011. "Of this sum 52.9 billion euros was loaned in the form of bilateral credit between Greece and the other countries of the Eurozone (excluding Slovakia, Estonia and Latvia), while a further 20.3 billion euros was provided by the International Monetary Fund (IMF)."
  • Second package was extended in February 2012 in the form of credit from the European Financial Stability Facility (EFSF). "By December 2013 133.6 billion euros of this second package had been paid out. Moreover, the IMF also increased its financial assistance to Greece by 6.6 billion euros during this period."

In addition, Greece already restructured 52.9 billion euro of the GLF. Original loans were issued for 5 years term at an interest rate equivalent to the 3-month Euribor plus an interest rate margin of 3 percentage points for the first three years and 4 percentage points for the remaining years.

  • "The term of all loans was subsequently extended to 7.5 years in June 2011 and the interest rate margin was reduced by 1 percentage point." 
  • Subsequently, in February 2012 "the term was extended to 15 years and the margin was reduced to 1.5 percentage points for all further interest payments". 
  • In November 2012 the GLF lenders "doubled the term of the loans to 30 years and reduced the interest rate margin to 0.5 percentage points. 
So in effect, Greece had: 2 Bailouts and 3 adjustments to-date.


By Ifo estimates, the above revisions reduced real debt under the GLF by 12 billion euros.
"The envisaged further relaxation of credit conditions for the 52.9 billion euros of the Greek Loan Facility - with an extension of the term to 50 years and a reduction of the margin to 0 percentage points would entail further losses of around 9 billion euros for European creditors." 

Thursday, November 15, 2012

15/11/2012: The impossibility of Greek 2020 targets


Euromoney headlines today with an article on the impossibility of 120% debt/GDP ratio target for Greece (link here). It so happens that few days ago, I crunched through my own estimates on Greek debt holdings and dynamics. The below is based on data from:

  • Goldman Sachs Research (debt allocations)
  • IMF WEO
  • My own scenario 2 for growth shock
Here are the institutions holding Greek debt: 

Using IMF scenario (best case scenario, based on current 2013-2017 growth projections and 2018-2020 growth at 2017 growth rate of 4.586% nominal - representing the highest annual rate projected by the IMF for 2012-2017) and my own adverse scenario (assuming growth of 2.84% on average annually in 2014-2020 as opposed to the IMF assumed average growth of 3.59% on average), the table below shows summary of forecasts for 2020 debt outrun under:
  1. Status quo - implying 2020 outrun of 137% debt/GDP ratio in the case of IMF own projections and 148.5% debt/GDP ratio in my scenario 2;
  2. Case of imposing 75% haircut on ECB-held Greek Government debt (a writedown of €33.52bn) resulting in IMF-consistent scenario estimate of 123.2% debt/GDP ratio in 2020 and 134.1% debt/GDP ratio under my adverse growth scenario 2;
  3. Case of imposing - in addition to a 75% writedown of ECB-held debt - a writedown of 25% of EFSF-held Greek debt, delivering savings / cuts to the debt of €62.74bn - and yielding 2020 Government debt/GDP ratio of 111.2% in the case of IMF projections for growth (scenario 1) and 121.4% in the case of my scenario 2.

Thus, the bottom line is: unless 
  1. IMF projections for 2.84% average growth in 2014-2017, plus my assumption that in 2017-2020 Greek economy were to growth at the 2017 IMF-projected 4.59% hold, a 75% haircut on ECB-held Greek Government debt will not be enough to get Greek Government debt/GDP ratio anywhere close to 120%.
  2. To ensure probabilistically likely delivery on 2020 target of 120% debt/GDP ratio, Greece requires much more than a writedown of 75% of its ECB-held liabilities, but will most likely require some sort of action on EFSF side as well.

Friday, March 16, 2012

16/3/2012: Greek Bailout 2 - Globe & Mail


A quick link to my article on Greek bailout-2 for Economy Lab with Globe & Mail (here) and related subsequent article on ZeroHedge on the same topic (here).


Below is the full version (unedited) of the Globe & Mail article - double the length of the print version.


With the Greek Bailout 2 on its way, has euro zone escaped the clutches of the proverbial markets? Not a chance. Greece remains the eurozone’s ‘weakest link’ and Europe remains the Sick Man of the global growth. The reasons are simple: debt, liquidity and growth. Let’s first focus on Greece, debt and liquidity, with a subsequent post dealing with Euro area growth.

Part 1:
Debt-wise, Greece is now actually worse off than when the whole mess of the second bailout began. After the PSI that, together with the ECB swap, amounts to a $138bn debt writedown, Greece is now in line for $170bn in new loans, an additional $38bn EFF ‘pro-growth’ lending facility from the IMF, and a standing $40bn reserve loans facility for its banks. As of today, the expected Greek banks bailout bill stands at $63bn. Behind all that looms another $20bn yet-to-be-announced lending package that will be required to get Greece over 2012 targets, given the deterioration in its GDP. All in, Greek debt can rise by as much as $130bn with Bailout-2, although the most likely number will be around $100bn. This would bring Greek gross external debt from 192% of GDP projected pre-Bailout 2, to over 225%, using IMF figures.
Keep in mind that Greece cannot print out of this debt, nor can it expect to grow out of it. The Greek economy is expected to shrink -3.2% this year and post just 0.6% nominal growth in 2013. Thereafter, rosy projections from the IMF are for 3.3% average annual growth out to 2016. All of this growth is expected to come from gross fixed capital formation and exports. The former will be happening, according to the IMF numbers, amidst shrinking public and private demand and zero per cent private sector credit creation through 2014. The latter is expected to add 39% to the country exports of goods and services over the next 4 years. German tourists better start coming into Greece in millions, because feta cheese sales doubling between now and 2016 will not do the trick. In other words, the rates of growth envisioned by the IMF are purely imaginary.
On the liquidity front, European periphery remains largely outside the funding markets. Even Italy is now borrowing in the markets courtesy of ECB pumping cash into the country banks. Of the top ten LTRO borrowers by overall volume, seven are from Spain and Italy. Fifteen out of top twenty banks, measured as a ratio of LTROs borrowings to their assets, are from these countries. Since the beginning of 2009, ECB has unloaded some $1.65 trillion of new funds. Much of this went into the sovereign bonds and ECB deposits.
Now, here’s the obvious problem at the end of the proverbial Cunning Plan that ECB contrived to shore up ailing banks. Euro area banks are the largest holders of Euro area sovereign bonds. This reality was the main channel for contagion from the sovereign balancesheets to the banking system of the current crisis. LTROs 1 and 2 have just made that channel about a mile wider. Mopping up the expected tsunami of bonds that will hit private markets in and around LTRO winding up dates in 2014-2015 will be a problem of its own right. Coupled with the bonds redemption cliff faced by some peripheral countries around that time will assure that the problem will be insurmountable.

Part 2:
With the Greek Bailout 2 euro zone did not escape the clutches of the proverbial markets. The reasons are simple: debt, liquidity and growth. While the previous post focused on Greece, debt and liquidity, the current post deals with the core source of the weakness in the region’s growth dynamics.
With Greek Bailout 2, Europe has run out of options for supporting its failing states and in doing so, it has run out of room for its economies to grow. Domestic savings are stagnant and, given already hefty fiscal spending bills and rising tax burdens, availability of private capital will be a major problem for investment in the medium term.
Take a look at some numbers – again courtesy of the unseasonally optimistic IMF. Between 2011 and 2014, IMF predicts PIIGs economies to grow, cumulatively by between 1.7% for Greece, Italy and Portugal, 4.8% for Spain and 5.7% for Ireland. However, in recent months IMF has been scaling back its forecasts so rapidly and so dramatically, that the above figures can become, by April 2012 WEO database revision, -0.1% for Greece, 5.0% for Ireland, 1.6% Italy, 1.5 Portugal and 3.3% Spain. Not a single Euro area member state, save for Greece is expected to see more than 2 percentage point increase in gross national savings. Coupled with fiscal consolidations planned, this implies negative growth in private savings as a share of GDP in every Euro zone country. Over the same period, General Government revenues as a share of overall economy will increase on average across the old Euro area member states (pre-2004 EU12). The much-hoped-for salvation from external trade surpluses is an unlikely source for growth: between 2011 and 2014, cumulative current account balances are likely to be deeply negative in France (-7.4% of GDP), Greece (-16.9%), Italy (-7.5%), Portugal (-15.5%), Spain (-8.2%) and only mildly positive in Ireland (+4.9%). Average cumulative 2012-2014 current account deficit for PIIGS is forecast to be in the region of -8.7% of GDP and for the Big 4 states -1.6%.
This lacklustre performance comes on top of the on-going and accelerating banks deleveraging that will further choke of credit supply to the real economy. Hence, broad money supply across ECB controlled common currency area is declining and ex-ECB deposits, banks balance sheets have shrunk some $660bn in Q4 2011 alone, roughly offsetting the effect of the LTRO 2. You can bet your house the real retail cost of investment is going to continue rising through 2012 and into 2013, exerting a massive drag on growth. Thereafter, unwinding of LTROs will lead to a spike in the benchmark ‘risk-free’ sovereign rates, once again supporting inflation in the cost of business investment.
With all of this, PIIGS are going to be squeezed on all sides – fiscal, monetary / credit, and the real economy – both in the short run and in the medium term. Spain is the case in point with the latest spat with the EU on widening deficits. This week’s news that the EU decided to back down on its own targets for Spanish deficits does not bode well for the block’s credibility when it comes to fiscal discipline. But it signals even worse news for anyone still holding their breath for Europe to show signs of an economic recovery.
If anything, the last two weeks of the Euro crisis are reinforcing the very predictions I made some months ago – Europe’s governments are incapable of sticking to the austerity targets they set for themselves, and are unable to spur any growth momentum to substitute for austerity. In other words, Europe is now firmly stuck between half-hearted dreaming for Keynesianism by default and fully-pledged monetarism by design. As the ‘Third Way’ – this combination of policies is the fastest path to economic hell.