There is No Closure in Greece Whatsoever
Despite the Greek parliament’s approval of austerity measures, there is still considerable uncertainty in the Greek situation. This post outlines many of the issues still up in the air.
Greece raised more than it initially anticipated in today’s bill auction. It faces a bill redemption late this week. Greek bonds remain under pressure as the controversial Athens vote Sunday failed to deliver closure.
Three issues are pressing today, ahead of the Euro group of finance ministers meeting tomorrow. First, Greece officials need to identify 325 mln euro in savings that are needed to replace a piece of pension reform that the political leaders balked over.
Second, the creditors are looking for greater assurances that the commitments will be implemented after the election. At first this seemed a bit much, but look closely at what the New Democracy head Samaras (odds on favorite to become next prime minister) told the Greek parliament Sunday: "I want to avoid the jump off the cliff today, to buy time, to restore normality and to go to the elections tomorrow. This is why I ask you to vote in favor of the new loan agreement today to have the ability tomorrow to negotiate and to change the current policy, which has been forced upon us." Surely an reasonable reading of those comments raise questions about commitment.
Third, Finland is pressing ahead with its demand for collateral in exchange for supporting the second aid package for Greece. This is potentially disruptive because other countries may object to Finland’s special treatment and may seek collateral themselves. Recall that last year Finland struck a deal to get extra assurances in exchange for funding ESM up front.
Lastly, take another look at the sums involved. The first aid package was for 110 bln euros. The second package appears to be for about 130 bln euros. The private sector debt forgiveness may be worth 100 bln euros. This is 340 bln euros. Greece’s entire debt was about 350 bn euros at the start of the crisis.
The point we cannot emphasize sufficiently is that Greece is not being bailed out. Workers are losing their jobs, wages and pensions. Taxes are rising. The economy is contracting. We learned today that GDP was 7% smaller in Q4 2011 than in Q4 2010. For the entire year, the economy contracted 6.8%. The government has assumed a 6% contraction in 2011 for this year’s budget forecasts.
The fact that the VAT proceeds fell 18.7% in January is unlikely to reflect tax evasions as much a dramatic compression of demand.
If Greece is not being bailed out, where are the funds going? The vast majority of the aid money is going to service Greece’s debt. It the German proposal to set up an escrow account materializes, it would tear the veneer of illusion off the Greek bail out story and reveal the true beneficiaries of the aid is not Greece but its creditors.
The brinkmanship is not over. Several moving pieces remain. The European finance ministers meeting tomorrow. The IMF assessment about sustainability of Greece’s debt (where by some stretch of definitions 120% in 2020 is considered "good enough" and the risk is that this may be bumped higher) is required before a second package can be approved. The private sector initiative is still not fully closed as there is talk now to increase the proportion of Greek government bonds to be received in the swap and fewer EFSF bonds. The role of the ECB and national central banks in forgoing profits (the former) or taking some loss (possibly the latter) still needs to be worked out.
In addition, the participation rate in the PSI needs to be known for a number of reasons, including the retroactive insertion of collective action clauses into bond contracts. Finally, national governments need to approve the final agreement.