What a splendid currency is the euro!

From Citi:

The Euro Summit proposal does not include a clear commitment to debt restructuring, and essentially blames previous policy failures for Greece’s ‘insurmountable’ debt problems. It notes that “there are serious concerns regarding the sustainability of Greek debt. This is due to the easing of policies during the last twelve months, which resulted in the recent deterioration in the domestic macroeconomic and financial environment.” The proposal offers an agreement to consider ‘soft’ debt restructuring after the first positive assessment of the programme implementation, noting that “the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level”, and highlighting that “nominal haircuts on the debt cannot be undertaken”.

This position contrasts noticeably with that of the Greek government and the IMF. According to Greek PM Tsipras, the institutions had agreed to start discussing a reprofiling of Greek public liabilities this coming autumn, by ‘transferring’ to the ESM €27bn in ECB debt and €20bn in IMF debt. This process would have been conditional on full compliance with the bailout targets in the next few months (both in terms of budget and structural reforms). In an update of IMF staff’s preliminary debt sustainability analysis, the IMF concluded that an upfront debt relief agreement is needed because Greece’s public debt “has become highly unsustainable”. The IMF noted that Greek public debt is projected to peak close to 200% of GDP by 2017, and to remain elevated (170% of GDP) by 2022, while pointing to considerable downside risks to these projections. The IMF calls for debt relief on a scale that would need to go well beyond what has been considered to date, noting three main options: i) a “dramatic” extension with grace periods of, say, 30 years on the entire stock of European debt (including new assistance), ii) explicit annual transfers to the Greek budget, or iii) deep upfront haircuts.

The European Commission, in its assessment (dated July 10) of Greece’s request for a ESM bailout programme, is also recommending meaningful debt re-profiling, noting “serious concerns regarding the sustainability of Greece’s public debt”. The EU Commission recommends addressing these concerns either i) through a far reaching and credible reform programme (envisaging very strong ownership by the Greek government and debt-mitigating measures that would be granted only once reform commitments have been achieved), or ii) through “a very substantial reprofiling, such as a long extension of maturities of existing and new loans interest deferral, and financing at AAA rates”.

Based on our more conservative GDP and inflation baseline (and assuming no Grexit by 2022), and targeting a debt-to-GDP ratio of 120% by 2022, we estimate the size of the required ‘upfront’ (i.e. to be introduced in 2016) principal haircut to be €110bn (60% of annual Greek nominal GDP in 2014). Note that we do not see much difference in an alternative scenario based on a ‘tranched’ principal haircut framework (of around €15bn per year), also starting in 2016. However, a ‘backloaded’ (i.e. to be introduced in 2022) approach relying on a single haircut would be more expensive, amounting to €130bn (72% of annual Greek nominal GDP in 2014). All these scenarios illustrate how difficult, politically, principal debt reduction will be given the amount involved. The corresponding re-profiling (maturity extension, coupon reduction) would likely require grace periods extending into many decades.

It’s a pipe dream of course because although Europe could afford it, it can’t afford to do the same with Portugal, Spain and Italy. Yet by not doing it (or installing some form of fiscal equalisation) they will all eventually end up on the Greek scrap heap.

What a splendid currency is the euro!

Comments

  1. Tassie TomMEMBER

    It looks like Greece will eventually default. Like “The Boy Who Cried ‘Wolf!'”, when they do default it will have been flagged but no-one will have thought it would really happen. Institutions won’t be ready for it, and there will be a big panic.

    Greece missed an opportunity last week, but so did Europe. Europe was probably as prepared for a Greek default as they could possibly be, and the chaos would probably have been contained. It was Europe’s best opportunity to let it happen.

    As it stands now though, at some time in the future Greece will default into an unprepared world and the chaos will be malignant.

    • Yep – time for Greeks to withdraw the contents of their Euro Denominated Greek bank accounts as fast as the limits allow.

      The ECB. has shown its true colours.

      • Josh Moorrees

        I think given capital controls greeks will be drawing down continuously at their limits as long as the SCB allows them to stay open. I’d say this period has left a scar in their minds that isn’t going to be disappearing any time soon. As soon as they are able to wire money our watch the money pour out into euro banks. You’d have to be mad to have a greek account at this point.

  2. euro is not fiscal project but a political one. It’s stupid to think that financial argument is going to prevail at any point of time.
    The main goal of euro project is to enable germany and france to control the entire continent is euro is so far quite good for the purpose.

      • I think you are underestimating french elite
        reality is that desire for europe wide control it’s not desire of either franch or german people but their financial elites and the french financial elite is quite a powerful one

      • notsofastMEMBER

        In the short term the Euro is a death trap for the heavily indebted European countries. And in the medium term when the heavily indebted European countries fall they will eventually drag the wealthy European countries down with them.

      • But so are all the elites in Europe. They have had monies for centuries – some for a millennia. Some new – most old…

        I do not underestimate it, in fact, I know some of them quite well.

  3. Wow! The Euro summit language is a neat combination of sunk cost fallacy combined with a pigheaded rufusal to look facts in the face.

    Debt that can’t be repaid, won’t be repaid. They’re ruling out nominal haircuts, and the Eurozone’s deflation means no inflating the debt away.

    I guess it’s option 3 then; bring on the hyper nationalistic fascists who will be the only ones with the guts/craziness to tell the Eurocrats to go jump.

    • ErmingtonPlumbingMEMBER

      Yes, but will Greek National Fascists be any braver or successful in the battle against a Pan-European Fascism, where the destruction of the individual or even murder in the night! will be the fate af any who stand in the way of their Plutocratic agenda.

      Why do you think the Greek Prime Minister backed down? Even with the support of his people and party!

      This power grab has been building for some time.

      https://youtu.be/CY_BgnZdwko

  4. St JacquesMEMBER

    Is the Eurozone holding onto to Greece because of fear of a Russian naval base in the Med? Bah! let the Russians have it, it will be good for their suntans but militarily useless. Warships are just big fat juicy targets for missiles these days, especially in a space like the Mediterranean Sea.

    • True to a point – and its shallow as well. But the converse is true to, if any enemy naval force arrives in that region, Russian missiles are equally effective.

      Russians biggest problem now is demographics. Its population has estimated its fallen by 6-7m in the past decade alone since Putin has been in power, and could fall by a third by 2050! Much due to falling expected live expectancy rather than anything else.

      With Russia steadily weakening, does anyone think that they will be able to retain much of Eastern Russia or Siberia from the Chinese, despite their demographic issues, could/will sweep the Russians aside… It will happen, its just a question of when.

      The world is changing, and most don’t see it. China is building bases in the South China sea and most in the region will have to bow to their might. Mind you, we allow them to build several bases on our land in Antarctica without any regard of consequences, for a trade agreement that has no obvious benefits (and we still don’t know any details yet). There was a story in the Bible once, of two brothers, and one selling his birthright for a pot of stew…

      • Hill Billy 55MEMBER

        The question of demographics is very interesting. China is also not immune to a significant reduction in population, due to the one child policy, the skew of births towards male babies and the number of fecund young females who have left for distant shores.

        My prediction is that 2100 will see fewer people on Earth than 2000, even without significant wars or epidemics. How that transpires will be fascinating.

        At present China is exporting capital in two ways. Monetarily through purchase of assets, but also in human capital. It is the later export that is the bigger issue and how it plays out in the world demographics and similarly the political and socio-economic spheres.

  5. For those too stupid to know, here is the current Australian political mantra:

    1.Take care of ourselves first.
    We do that by stealth, legislation, diversion, hypocrisy, entitlement, negligence, opportunism, bias, alliances, etc.

    2.Take care of our ageing boomers. While they remain the largest political mass, there are votes in it for us. Don’t rock the boat. Let them price-gouge their kids. Let them continue to invest in property to secure the impoverished state of their children. We will open the floodgates to the Chinese and turn a blindeye to illegal foreign property investment. Our kids are too weak to be able to change it. And their parents are too useless and gutless to advocate on their kids behalf. They sit there in paralysis, but in comfort of their own security, while their own government endorses that inaction, and endorses the status quo of visionless nothingness.

    3.Take care of our growing replacement workforce.
    Yes, our dear immigrants, our 457 friends. The ones that will challenge and outcompete our children for the crap jobs left. These guys can jump the queue for so many things that our local youth take for granted. We can employ these guys at low rates and they will willingly accept this over war. We can tell our kids how lazy they are, and conceal the truth to them that lower living standards are part of the new Australia we envision.

    4.Take care of our dear Chinese friends.
    We love our FTA with China. This will cement our kids future of a nation filled with illegal foreign property investment. We will allow our nation to be filled with Chinese cheap labour that don’t have practices that abide by Australian standards, with land decimated with the legacy of pollution, just like they’ve done in their own backyard. we will trust the Chinese to do the right thing by Australia, but we still wonder why they wait till our Christmas time to execute many of their own people, let alone why they are building artificial islands, or whit they stole 20 years of technology off the yanks.

    5.Last, and least…..take care of our children by allowing them to leave Australia, by allowing the drug trade to infiltrate their generation unabated, and allow them to remain cynical of their own selves.

    KIDS….AUSTRALIA HAS FORGOTTEN YOU. Politicians represent one group, and it is not yours. LEAVE.