A Deadline Comes and Goes

Last week Ekathimerini reported that the Greek government had only until Sunday night to accept the latest demands of the 'troika' in order to get the next bailout tranche of €31.5 billion released.

„The government is facing a Sunday deadline for a full agreement on the package of measures that will see it cash in the next bailout tranche of 31.5 billion euros.

The three-day extension it got in order to get maximum backing within the three-party coalition will be necessary as minor partner Democratic Left insists on an improvement in the terms concerning labor reforms that it staunchly opposes.“

It appears now that there is still no agreement among the Greek coalition partners on the labor reform package – which means that another deadline has been missed.

According to Reuters:

„Greece's foreign lenders have refused to make any further concessions on changes to labour laws contested by a junior coalition partner, the country's finance minister said on Sunday, prolonging an impasse on a crucial austerity package.

Athens has been locked in talks with its European Union and International Monetary Fund lenders on the austerity package for months, but a final agreement has been held up by the small Democratic Left party's refusal to back the new wage laws. The party, which says the changes undermine labour rights, has said it will vote against the measures when they are put to a parliamentary vote next week.

The party has demanded the troika of European Commission, European Central Bank and IMF lenders allow a national wage agreement to apply to all employees rather than just unionised workers. It also wants the lenders to withdraw a plan to axe the 10 percent salary hike employees get when they marry. "The troika has not accepted the (party's) demands," Finance Minister Yannis Stournaras told reporters. A government official, who declined to be named, said Athens would present the bill on labour and other measures in parliament on November 5.

Near-bankrupt Greece needs a comprehensive deal on the austerity package and reforms to unlock its next tranche of aid before it runs out of cash in mid-November. Greece's gross public debt is equivalent to 171 percent of its economic output, according to the International Monetary Fund.


(emphasis added)

To be sure, the measures could be passed even if the Democratic Left's (DL) 16 deputies in the parliament were to vote against it – PASOK and New Democracy muster 160 of the 300 parliamentary votes between them. The problem is that this could lead to a break-up of the coalition and without the DL, the majority becomes so thin that the government could eventually be forced to call new elections (all it would take would be a few defections by MP's, which are not uncommon in the contentious wrangling over austerity). In that event, SYRIZA would likely emerge as the winner. According to recent polls, SYRIZA would comfortably win a relative majority of more than 30% of the vote if an election were held today. Due to Greece's electoral arithmetic it would then automatically get 50 additional seats in parliament which are currently held by the conservative New Democracy party.


Greek Economy – Tentative Signs of Improvement

Unemployment in Greece is still hitting new highs (the most recent reading was above 25%), a circumstance that no doubt adds to SYRIZA's electoral appeal. However, unemployment is a lagging indicator. There are a few tentative signs that the economy may actually be improving. For instance, industrial production showed a 2.5% year-on-year increase – the first such increase in over five years. Moreover, Greece's current account balance has turned positive, a sign that the imbalances of the bubble years are finally dissipating. An especially noteworthy aspect is that a strong upward trend in exports has been recorded. The trade deficit still persists, mainly due to oil imports, but has fallen to its lowest level in many years as well. 



Greek unemployment by age group – still rising. The latest overall reading was 25.1%, with joblessness especially pronounced among young people (chart via Scott Barber/Reuters) – click for better resolution.



Greece's industrial production has recorded its first instance of year-on-year growth last month – click for better resolution.




Greece's current account deficit has become a surplus – click for better resolution.



Exports are growing in spite of a weak global economy – click for better resolution.



The Athens stock exchange has risen strongly, in spite of the fact that will soon lose its biggest component stock by market cap, the Hellenic Coca Cola Bottling company. The market seems to expect a brighter future, in spite of all the negative headlines – click for better resolution.



A word regarding the Greek stock market: due to the decision of the Hellenic Coca Cola Bottling company to move its headquarters and main listing out of Greece, MSCI is highly likely to demote the Greek stock market to 'emerging market' status.  Given that this happens just after the market has risen by almost 90% from its lows over a mere five months, we would actually be inclined to regard such news as a bullish contrarian sign – click for better resolution.



Debt Targets Will Be Missed

On Thursday the IMF released its estimate for Greece's future public debt trajectory. It concluded that the targets that have been agreed upon with the country's lenders will be missed. This is of course not really surprising, but the realization that the government's debt mountain is an insurmountable problem may now finally lead to another debt restructuring – with official lenders bearing the brunt of it.

There is only one problem with this idea (which the IMF is pushing for) – it is a hard sell politically in the countries that have guaranteed the bulk of the Greek bailout, especially in Germany.

“It is clear that Greece is off track and there is no chance they will cut the debt to 120 percent of GDP in 2020 as envisaged. It will be rather 136 percent, and this would be under a positive scenario of a primary budget surplus, a return to economic growth, and privatization," a euro zone official, who insisted on anonymity, said.

"New prior actions will be needed, on top of the existing 89," the official said, referring to a list of already agreed reforms that need to be in place before any new tranches of euro zone and IMF emergency loans to Greece can be paid.

Apart from the debt projections, representatives of the IMF, the European Commission and the European Central Bank – known as the troika – have been calculating how much more money Athens will need if it is given until 2016 rather than 2014 to reach a primary surplus of 4.5 percent, as agreed in February.

A primary surplus or deficit is the budget balance before the government services its debt. In Greece's case, it would mean government tax revenues exceeding spending, meaning Athens is beginning to get on top of its budget-deficit problems.

The two extra years would give the fast-contracting Greek economy some welcome respite, allowing it to return to growth sooner and therefore increasing the chances the country would eventually be able to make its debt sustainable.

"Additional financing needs for Greece are now seen at around 30 billion euros ($39 billion)," the official said after the EWG meeting. Estimates from various officials since July varied from 13 billion to 30 billion and on Thursday another official estimated the financing needs at 16-20 billion euros.

The critical question is where the additional money would come from. "The IMF is pushing for OSI (Official Sector Involvement) in Greece, Germany is strictly against. And they are not the only ones," the euro zone official said.


(emphasis added)




Greece's government spending has declined to levels last seen in 2007 – click for better resolution.





The public debt to GDP ratio has however soared to 165% – click for better resolution.



Bloomberg informs us that a report in the newest edition of German news magazine Der Spiegel (the online version of the Spiegel article isn't available yet) asserts that the 'troika' is now seriously looking at the possibility to forgive some of Greece's debt. However, once again, it is pointed out that Germany and a few other (unnamed) countries remain opposed to the plan.

“The European Commission, the European Central Bank and the International Monetary Fund proposed a restructuring of Greek debt that would require public-sector lenders to take heavy losses, Spiegel reported.

Representatives from the so-called troika presented their plan at a meeting of high-level officials from euro-area finance ministries on Oct. 25, according to an article in this week’s Spiegel magazine, which didn’t say where it got the information.

This would be the first time euro aid would cost taxpayers “serious money,” Spiegel said. Public creditors to Greece would be expected to participate and to relinquish a large part of their claims, it said. European policy makers are awaiting the final report, due by Nov. 12, on Greece’s progress in meeting internationally agreed targets compiled by the troika.

The Frankfurt-based ECB, which owns 40 billion euros ($52 billion) of Greek government bonds, isn’t allowed to take part in the restructuring. Instead, the central bank would “make available” any profit it makes on the bonds, Spiegel said.

Greece has only completed about 60 percent of the required changes, the troika’s presentation showed, according to Spiegel. The Greek government is discussing 20 percent of the revamp, and the remaining 20 percent hasn’t been addressed.

The troika recommended measures to force Greece to fulfill promises, including a provision to automatically raise taxes if reforms aren’t completed. Greece will be given two more years to get its budget on track, Spiegel reported. Representatives from some countries, including Germany, opposed the proposal, Spiegel said.


(emphasis added)

There is however nothing really new in this proposal. The idea that the ECB should make the gains it makes on the Greek bonds it holds available has already been commented on by the central bank on past occasions. The ECB distributes any profits it makes to the euro area member states anyway (according to the capital key). What is then done with such profits is up to the governments concerned. It seems likely that the wrangling will continue for a while yet, at least until next year's elections in Germany have passed.

However, we continue to expect that Greece will in the end receive the next bailout tranche. As we have pointed out before: it is the only way by which the euro's 'irreversibility' can be preserved (for now).



The evolution of Greek budget, cumulative public debt and economic growth forecasts for 2013 over time: the projections of the European commission made a year ago and in March 2012 compared to the most recent Greek draft budget numbers.



Sins of the Past

It was well known to the powers-that-be in the EU that Greece was never fit to join the euro. At the time Greece's accession was agreed upon, there were already plenty of warnings that the government was fudging the numbers – and yet, the eurocrats were so eager to admit Greece, that they simply refused to listen.  Two years later, in 2004, the topic came frequently up for discussion again, as the Greek government spent money with both hands in the run-up to the Olympic games.

However, it was deemed far more important to 'continue with the European project' – critical voices were always silenced. Moreover, the big 'core nations' Germany and France had themselves violated the Maastricht limits in the 2001-2002 recession and its aftermath. At the time no-one cared to enforce the stability pact's rules and financial markets took these violations in stride, so there seemed nothing to worry about. This was a signal to smaller euro area nations like Greece that they could get away with violations of the pact as well.

The Greek state remains dysfunctional – corruption in the political elite and the bureaucracy is widespread. As a result,  everybody tries to avoid paying taxes. Greece's shipping magnates don't pay  taxes in Greece by way of a privilege – their tax free status is actually enshrined in the constitution. They keep only small management bureaus in Greece, which could be shifted elsewhere in a heartbeat if this status should be altered. We recently saw an interview with Greek shipping tycoon Evangelos Marinakis. Asked why he didn't want to pay taxes to the Greek government, he said (we are paraphrasing, as this is from memory): “Pay taxes? That would be crazy. Would you pay taxes to Al Capone?”  He actually has a point, and it is a feeling that is probably shared by many Greeks.

This is unfortunately a problem that won't go away, regardless of how the currently extant debt pile is dealt with. It is little wonder that a number of lenders want to put as much pressure as possible on the Greek government, as far-reaching and radical fundamental reforms will be required if Greece is to achieve a sustainable economic recovery.




Charts by: Scott Barber/Reuters, tradingeconomics, bigcharts



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One Response to “Greece – Is Another Debt Restructuring Imminent?”

  • That is a great comment by the shipping guy. It applies to some extent around the world.

    My question is can any of these outfits do math and if they can, how is it that a country that can’t grow without deficit spending reduce their debt to GDP? The over 100% GDP figures that have continually been put out are a joke, as the country is impossibly broke with debts at that level. The only thing that keeps it afloat is more money.

    Clearly Greece has a long history of default. The banks that made the loans should have had to take the losses. All these actions are to accomplish is to put the losses on someone other than who made the mistakes. This includes actions taken in the US. Hence the Al Capone comment. They should have declared Greece broke, distributed the losses, liquidated the shareholder capital in the banks, distributed the losses, fired the managers, recapped the banks and sold stock instead of this shell game. Greece should have been told they owe about 40% of GDP and the market was on its own.

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