So Greece got a deal yesterday and , as expected, it was a range of financial and political concessions that will provide temporary relief in the hope that it will fall off the radar throughout 2013.
It must be remembered, however, that this is the second major adjustment to the second bailout for Greece which came after the initial bailout of May 2010. Statements made at yesterday’s conference by EU officials suggest it won’t be the last.
The main components of the deal are:
- The target for primary surplus of 4.5% of GDP has been postponed from 2014 to 2016.
- The target for debt to GDP is 175% in 2016, 124% in 2020.
- 1% interest reduction on bilateral loans, excluding Portugal and Ireland who are already on programmes themselves.
- Bilateral and EFSF loans maturities extended from 15 to 30 years and EFSF fees has ben lowered by €600 million.
- Profits from ECB’s SMP will be forfeited from 2013 except again by Portugal and Ireland.
- A debt buyback program will be initiated although the details are still a little vague.
All of this comes with the normal conditionality that Greece has been under since 2010 including €11.5bn in fiscal adjustments agreed to last month plus some new terms called “automatic correction mechanisms”. Again these are a little vague at this stage, but it appears that Greece is expected to adjust its targets dynamically whenever it falls behind. I’m not sure, however, how this is supposed to be achieved in practice.
The buy-back rumour has been swirling for a few weeks, in fact I mentioned it first over 2 weeks ago , so there has been plenty of time for front-running which may mean that the Friday close price which is to be offered as the target may well be too low to get interest. Normally for involvement in these types of affairs debt holders are provided with some type of premium in order to drag them over the line, at this point in time that doesn’t look like it is the case.
The other question on the buyback is how it will effect the Greek banks who are, once again, involved in a default of the government. Greek banks hold approximately €15bn worth of Greek debt much of which was purchased around the same price as last Friday’s close. That being the case banks, along with Greek pension funds that hold approximately €9bn, are unlikely to see more than a razor thin profit on these numbers and forcing them into a deal appears counter-productive. The rest of the €62bn in privately held debt is reportedly hedge fund assets.
How will the buy back be funded ? Well it’s all a bit vague at the moment as you can see from Wolfgang Schaeuble’s overnight comments:
The financing for a potential Greek debt buyback program that could reduce the nation’s crushing debt load will come from the package of additional financing measures agreed to by Greece’s public lenders early Tuesday, German Finance Minister Wolfgang Schaeuble said Tuesday.
Mr. Schaeuble said he is “relatively confident” a Greek debt buyback program would work, though, he added, additional instruments are available to reduce Greece’s debt load should the scheme fail.
Previously, Mr. Schaeuble had advocated that Greece should be able to draw as much as 10 billion euros ($12.96 billion) in additional funding from Europe’s temporary bailout fund–the European Financial Stability Facility–in order to finance a debt buyback program. Yet, that measure was not included in an agreement reached by euro zone finance ministers, the European Central Bank and the International Monetary fund early Tuesday.
The funding for such a debt buyback program, Mr. Schaeuble said, would stem from the reduced interest rates that Greece will pay on its loans, as well as payment to Greece of the profits made from the European Central Bank’s bond-buying program. Greece could also fund a debt buyback program through the use of short-term loans, or T-bills, Mr. Schaeuble said.
In the meantime it is now up to national governments to approve this deal with Angela Merkel urging her party to pass the bill this week, and the final approval is expected by Dec 13 however this is dependent on the timing of the buy-back. Assuming all goes to plan the Greeks will get €23.8bn for a banking recap, yes the same ones that were involved in the PSI+ and supposedly the latest buy-back, and a further €10.6bn for the government sometime in December. If conditionality is met this will be followed by another €9.3bn during Q1 2o13, but it must be remembered this is all new money that will be added to Greece’s existing debt.
So will this put Greece on a sustainable path to growth? I can’t see it. The target of the items above is for a 20% reduction in overall debt, which, although is obviously substantial, ignores the key issue that Greece’s economy continues to shrink. The PSI+ wrote-off €100bn but if you look at chart below you could hardly tell:
