Taking Stock of the Greek Issue

After a lot of discussion about imposing strict provisions to obtain new funds, the EU disbursed another loan for Greece with a few strings attached. I spoke with Monica Defend, Pioneer’s Head of Global Asset Allocation Research, to get her opinion on some questions asked.

Was this an urgent request?

The funds were urgent indeed. So much in fact, the first tranche of €34.3bn was released in a matter of days. Of this, about €16bn is allocated to bank recapitalization and bank resolution, €7bn for budgetary financing, and €11.3bn to finance debt buyback. The disbursements are in cash (for Greece’s budget needs), EFSF bonds and bills. An additional €7.2bn will be disbursed as early as January for bank recapitalization. The remaining amount will be distributed no later than the first quarter this year if Greece meets the targets set by the creditors’ group, but this conditional tranche is about half as much.

Part of the funds immediately released must finance a debt buyback. Is this something new in Greece’s bailout plan?

The Greek government agreed with its private creditors to buy back nominal €31.9bn of bonds in a wide spectrum of maturities, so the €11.3bn needed was a “haircut” of about 70%. The goal is to reduce its debt burden which has continued to rise since the first rescue operation was decided more than two years ago.

How do creditors deal with Greece’s fiscal ratios in this backdrop?

Updates are needed on a continuous basis, with the latest being the postponement of the primary surplus target of 4.5% of GDP from 2014 to 2016. Based on the new projections, by the end of the current IMF program in 2016, Greece is expected to reach a debt-to-GDP ratio of 175%, in 2020 a ratio 124%, and in 2022 a substantially lower ratio than 110% is targeted. The previous scenario had envisaged a debt-to-GDP ratio of 120% in 2020.

How comfortable would creditors be with the idea of “debt relief” for Greece?

A thorough assessment of the current measures needs some additional analysis. The largest creditors do not accept in principle the idea of debt relief, but Greece’s burden was eased on many counts:

  • The interest rate charged on the loans provided with the first bailout program was lowered by 1%
  • Bilateral and EFSF loans had maturities extended by 15 years, and interest payments on EFSF loans deferred by 10 years.
  • EMU members will devolve to a segregated account, an amount equivalent to the income on the bonds purchased by national central banks on behalf of the ECB under the first buying plan (SMP)

Can this political willingness bring any results?

It remains to be seen at this stage. We can say, however, that euro zone officials have shown a lot of flexibility in dealing with Greece’s efforts. As the crisis extended to other countries, EMU politicians have put the integrity of the euro area above all and are unlikely to give up on their efforts should further difficulties arise. A Greek exit from the euro area does not seem to be an option any longer, but Greece must continue its efforts to return its public finances to a sustainable path.

© Pioneer Investment Management


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