Robert Kahn

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Greece Gets Its Deal

by Robert Kahn
November 27, 2012

We finally have a financing deal for Greece.  For those who haven’t been following the blow-by-blow, a summary is below, or you can read the official announcement.

A few quick observations:

Don’t pay much attention to headlines on long-term debt reduction.  This is a kick-the-can solution that defers hard decisions until 2013.  While Greece’s official creditors recognize that the new government has taken significant steps and that recent measures passed by Parliament are worth supporting, the program is widely seen as unrealistic and lacking credibility with markets. Greek debt remains too high, the government will struggle to meet the ambitious terms of the agreement, and a recovery from a deep recession seems a long way off.  A Greek exit from the euro zone and/or a comprehensive default on debt still is the most likely scenario.

Markets seem pleased that the deal involves meaningful official sector involvement (OSI) through debt and cash flow relief.  This is the most that Europe can do for now on OSI, given the multiple “red lines” creditor governments have set out.  Over the longer term, I’d still argue that these red lines need to be erased and a more comprehensive approach to OSI adopted.  But, for now, Greece sets the precedent for the rest of the European periphery.

This deal provides little “free” cash for the government to spend.  The vast bulk of the package provides for further recapitalization of the banks, repayment of arrears and maturing debt, and a debt buyback from private holders.  That leaves only a modest amount of discretionary fiscal spending for the next few months. As before, Greece will depend importantly on sales of government debt to Greek banks to finance itself, which in turn is made possible by liquidity from the ECB. That’s a new definition of recycling, whereby the monetary authority is the ultimate provider of financing to service official debts.

The IMF seems to be slowly getting comfortable with the agreement. Their disbursement is expected to follow completion of the buyback in December.

 

Summary of the Deal

Greece will receive financing totaling €43.7 billion, consisting of €10.6 billion for budgetary financing, €23.8 billion in European Financial Stability Facility (EFSF) bonds earmarked for bank recapitalization, and €9.3 billion to be paid in three tranches during the first quarter of 2013 if Greece meets the program conditions.  Final approval of the package is expected by December 13 after Parliamentary approvals and the debt buyback (see below), in order to finance a €5.4 billion redemption payment on December 14.

In support of the deal, EU governments agree to:

  • An EFSF loan for debt buybacks of up to €10 billion of privately-held Greek bonds at prices prevailing before the deal (23 to 35 cents, depending on maturity). It is expected the bulk of the buybacks would be from Greek banks.
  • A lowering by 100 basis points (bps) of the interest rate charged to Greece on loans provided by European governments through the Greek Loan Facility (GLF), to 50 bps above interbank rates (worth about €2 billion).
  • A lowering by 10 bps of guarantee fee costs paid by Greece on the EFSF loans (reportedly worth €0.6 billion).
  • An extension of the bilateral and EFSF loan maturities by 15 years and a deferral of Greek interest payments on EFSF loans by 10 years.
  • A commitment to pass on to Greece future income on certain debt, such as the Securities Market Program (SMP) portfolio, which is reportedly worth at least €7 billion.

These measures aim to reduce the debt-to-GDP ratio to 124% of GDP in 2020 and to below 110% of GDP in 2022.

Post a Comment 5 Comments

  • Posted by Charles Blitzer

    The buyback makes little if any sense. Greece borrows an extra €10bn to buy 3 times that amount of new bonds in order to reduce its debt/GDP ratio. But its receives very little near term cash flow relief. Surely the “new” money from the EFSF would be better used to help stimulate the greek economy. Speeding recovery is crucial to maintain support for the adjustment/reform program and reduce the chances of a costly (to all) Grexit..

  • Posted by Calvin Chua

    It is a scheme to help the banks and not the people. Again, we have seen odious debt here. Just stuff Greece with more debts until she suffocates and die out. Then we will have Argentina.

    God bless Humanity, where does our greed ends ?

  • Posted by Rob Kahn

    Charlie Blitzer’s comment is hard to disagree with. For a country that is seen as deeply insolvent, a buyback of debt on market terms offers little benefit in NPV or cash flow terms. Further, this operation is justified as helping to meet an arbitrary debt/GDP target 10 years out when few, if any, believe the program will succeed. However, if most of the debt bought is held by Greek banks, it can be seen as part of a broader negotiation over the dilution/recapitalization of those banks as well as a signal of future OSI. In the end, I suppose the unwillingness to instead give more fiscal space to the government reflects concerns about Greece’s commitment and capacity to adjust rather than enthusiasm about buybacks.

  • Posted by Panagiotis Kikareas

    I have been following this scenario of Greek economy and grave political and financial mistakes and mismanagement for the last 30+ years.
    I wonder why the EU , IMF, and Greek Government can not see that the Country is led to a most probable chaos and unrest. The Greek people have overpass the limits of household financial disaster and it is questionable how long this might continue. If job creation and projects development don’t start ASAP then default will happen for sure. It is not for the best interests of EU and Western Allies Greece to enter a chaos and unforeseen Government.

  • Posted by Forbes Huang

    You do a great job of laying out the details of the deal, which only highlights the stark reality that Greece has few, if any, tangible plans in place to pay down its debt. Greece’s plight stems from foundational issues more so than financial ones – the Government does not have the resources to collect its forecasted tax revenues, nor for that matter, to even persuade its citizens to pay in the first place. To collect taxes, the citizens need to have taxable revenue; to have taxable revenue, the economy must be able to generate jobs and to generate jobs in the midst uncertainty and stagnation, the Government needs to have a credible plan in place to revive the economy. Given, however, that Greece has minimal, if any, free cash flows and that the bailout “leaves only a modest amount of discretionary fiscal spending for the next few months,” one would be hard-pressed to characterize this deal as anything more than a band-aid for a very serious infection.

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