The European meeting marathon continued over the weekend. Thus far, so far as I can tell, they have decided and/or resolved nothing of any substance while the overall view of the crisis itself has got considerably worse.
The Troika’s latest report on Greece’s debt sustainability has been leaked and it showed that they have finally realised just how completely unsustainable the situation, which they were part of creating, has become:
Since the fourth review, the situation in Greece has taken a turn for the worse, with the economy increasingly adjusting through recession and related wage-price channels, rather than through structural reform driven increases in productivity. The authorities have also struggled to meet their policy commitments against these headwinds. For the purpose of the debt sustainability assessment, a revised baseline has been specified, which takes into account the implications of these developments for future growth and for likely policy outcomes. It has been extended through 2030 to fully capture long term growth dynamics, and possible financing implications.
The assessment shows that debt will remain high for the entire forecast horizon. While it would decline at a slow rate given heavy official support at low interest rates (through the EFSF as agreed at the July 21 Summit), this trajectory is not robust to a range of shocks. Making debt sustainable will require an ambitious combination of official support and private sector involvement (PSI). Even with much stronger PSI, large official sector support would be needed for an extended period. In this sense, ultimately sustainability depends on the strength of the official sector commitment to Greece.
The report goes on to explain a number of possible scenarios and their financial implications. The worst case being:
A combined shock—to represent a scenario of strong internal devaluation enforced by a much deeper recession—would sharply raise debt in the near- term. To model this it is assumed that through much deeper recession and deflation the competitiveness gap is unwound by 2017, instead of during the next decade. The headwinds from the deeper recession are assumed to delay the achievement of fiscal and privatization policy targets by three years. As the economy rapidly shrinks, debt would reach extremely high levels in the short run at 208 percent of GDP. If Greece could weather the shock to confidence this could create, the eventual more rapid recovery of the economy would help bring debt back down towards the revised baseline path, but it would remain at a very high level in 2020 (173 percent of GDP).. Market access would not likely be restored until 2027 (under the assumptions on access used, in particular the 150 percent of GDP debt threshold). Cumulative additional financing needs (including rollover of existing official debt) could approach €450 billion.
That is, without private sector involvement and under what I consider to be quite a plausible situation, the entire value of the current EFSF would be swallowed up by Greece alone over the next 20 years. Obviously I take issue with such long term analysis, but it certainly gives you an understanding of just how big a problem Greece has become. The following chart shows the Troika’s estimates under different scenarios, you can see that even under a 60% write-down by the private sector that is now being touted by the Germans it is still estimated that Greece will still require an additional €109 billion over 10 years:
This “leaking” surely suggests further severe and unresolved problems in the meetings, which seem to have produced very little at this point. Most reports nonetheless remain bit up-beat about possible outcomes unless they come from the Telegraph UK which seems to be running the soap opera commentary.
It was agreed that a full European Council meeting will precede Wednesday’s eurozone meeting which will include all 27 nations, not just the 17 Euro nations. The decision for the EFSF seems to have been narrowed down to 2 options after reuters reports that Sarkozy has given up on any attempt to convince the Germans that the ECB needs to be involved even though it was understood to be his strategy over the weekend.
There still seems to be no agreement on what to do with Greece even though the Troika have made it very clear there really isn’t any other option but a large private sector write-off. How this could be achieved without some sort of credit event or ratings downgrade is still a very big unknown.
Still, leading some support on that front, there does seem to be a preliminary agreement on bank recapitalisation, with most reports stating the value of approximately €100bn has been agreed on. However, given the state of the European banks and the ever-worsing state of periphery economies I consider this number to be a woeful underestimation but as least the Eurocrats seem to have decided on something.
Part of the issue with making any decision is that the three issues of Greece, the EFSF and the bank plan are linked together. The amount required for banks recapitalisation is dependent on the private sectors involvement in Greece, and the ability for single nations to recapitalise their banks will be dependent on what the EFSF ends up becoming. There really needs to be a decision on all three at once but the difference of opinions on each of these three is adding to the problems. The fact that Wednesday’s meeting now has an additional 10 member countries involved is not going to help that situation, and that is leaving out the fact that private sector banks also have to agree with whatever the outcomes end up being.
The slowness of the decision making process seems to be getting to a few people including EU Chief Jean-Claude Juncker who had a bit of a spray at the Germans yesterday:
Eurogroup chief Jean-Claude Juncker has criticised Germany’s slowness in reacting to the eurozone debt crisis.
‘Organisational speed in Berlin is slower than in the other capitals,’ Juncker, who is Luxembourg premier said on Sunday in an interview with the online edition of Der Spiegel.
He referred to a Constitutional Court ruling in September requiring parliament’s budgetary committee to approve any financial proposals on the eurozone bailout fund.
‘The Bundestag (lower house of parliament) cannot decide everything in detail in advance because sometimes at summits things are negotiated to the very end,’ he said.
Although he said he understood parliament wanting to keep hold of the reins on budgetary issues, he said ‘but that must not lead to the EU not being able to react with the necessary speed.’
Just 4 days left until a “comprehensive plan” for Europe is supposed to be delivered and so far I have been underwhelmed by what I have seen. I hope that situation changes over the next few days but given the last 2 years I remain pessimistic.