As I type, news is beginning to trickle out that after 12 hours of talks European financial leaders and the IMF have come to a deal on Greece to cut debt down to 124% of GDP by 2020 through a package of extra cuts totaling 20% of GDP. This looked like a win for the IMF who were pushing for an up-front cut on Greece’s debt in order to meet its own “sustainable” path.
The trouble is that Reuters and Dow Jones appear to be reporting two different stories about exactly what has occurred with Reuters suggesting there is a deal while Dow Jones is reporting there isn’t yet.
So thus far I haven’t seen any detail of a deal so just how this is to be achieved is still unknown. Prior to the meeting the options were for the the ECB to roll over profits, a lengthening of maturity or lowering of rates of existing loans, and/or providing additional funds to allow the country to buy back its own debt.
Obviously all of these are in the realm of an official sector haircut and Germany, at least publicly, stated that they couldn’t support official sector haircuts at the same time as agreeing to new bailouts because the prior action negates the guarantee on the later. All fair enough in a technical sense but that position did little to break the deadlock.
So we are looking out for some form of compromise because the alternative is a ‘grexit’ and real bookable losses to creditor nations. Obviously we now have to wait for further details but again I do wonder exactly how Greece in its current state, and with yet another €11bn of cuts ahead of it over the next two years, is expected to grow at a rate that is can lower government debt approximately 65% over 8 years.
There is a webcast due shortly that you can view here.
Overnight we also heard from World Bank Chief Economist Kaushik Basu who had very little positive to say about the state of Europe:
Three-year loans granted by the European Central Bank last year will disrupt the global economy when the debt matures in 2014 and 2015, according to World Bank Chief Economist Kaushik Basu.
“It’s a debt wall that’s going to come up to us,” Basu said at a seminar in Helsinki today. “We’re going to get another big rocking of the global economy in 2014, 2015.”
The ECB’s injection of more than 1 trillion euros ($1.3 trillion) of three-year liquidity into Europe’s banks in December and February was intended to be a game changer that would jump start lending in the region. Instead, the crisis grew deeper, drawing a subsequent pledge from ECB President Mario Draghi to do “whatever it takes” to backstop the 17-nation currency zone. The ECB’s lifeline only “bought time,” Basu said. “It doesn’t solve any of the fault lines.”
….
The best-case scenario would be for European growth to stagnate until 2015 before picking up, Basu said. The comments don’t indicate that the World Bank is likely to cut its latest forecast, he said.
The Washington-based lender projects 2.5 percent economic growth for the global economy for this year. Next year, gross domestic product will increase 3 percent, according to a June forecast. That compares with 2.7 percent growth last year and 4.1 percent in 2010. The World Bank estimates the euro area will contract 0.3 percent this year.
So the best case is stagnation over the next 2 years, which I consider too optimistic given current circumstances, the LTRO has failed to produce the re-ignition of lending, as I said it would, and when it comes time to reverse the long dated repo it will produce a new round of instability. Certainly not a great review from one of the world’s most important economists.
And finally overnight, the European Commission has revised up its forecast for the Spanish deficit to 6.4% while Spanish mortgage volumes fell another 32.2% YoY. Again none of this is surprising.