Greece has set forth an initial proposal to cover its financial requirements for 2015, which, however, seems very unlikely to be accepted. Time is tight. The truth is that the country needs new international assistance fast, and that this will not happen outside a programme which imposes conditions…….
Intesa Sanpaolo – Research Department – For professional investors and advisers only
Will the Greek government mana ge to bear the political costs? Already next week, some light should be shed on th e actual leeway the country may get. The EU Commission ’s updated public finance estimates hint that Spain may need to implement additional measures already this year, whereas Italy seems to be in condition to pass the test at the beginning of March; France is walking a fine line.
The Greek government has set forth an initial proposal to overcome the financial assistance programme expiring 28 February. In waiting for a structural solution to be found, it has requested that the ceiling on T-bills issues be raised from 15 to 25 billion, an exchange with perpetual bonds of the GGBs held by the Eurosystem, in turn the result of an exchange with the bonds purchased under the SMP, and the release of the ECB’s Greek portfolio earnings. The three measures would cover most of the estimated financial gap for this year, transferring the entire burden of debt to the central bank’s balance sheet; the fact is that these proposals are simply unacceptable. What’s more, the decision torenounce the final tranches of the assistance programme has had the consequence of making Greek government bonds no longer eligible as collateral, forcing local banks to replace by 11 February recourse to refinancing operations under the emergency liquidity assistance facility (ELA) issued by the Bank of Greece. The ECB’s move makes a solution all the more urgent. On the other hand, it is still unclear how much time is left for the Greek Treasury before defaulting. Certainly it cannot survive beyond the end of May, but the time on its hands may be even shorter.
The approach chosen by Greece has several weak points.
First of all, it has reduced financial independence, destabilised banks, and worsened the economic situation.
Secondly, the country needs new financial assistance to avoid a catastrophic crash, and in case of default it has much more to lose than its creditors.
The third weak point is that financial aid will never be issued without conditions, due both to existing legal constraints and to a lack of political will.
Concessions will be possible on terms of repayment of European loans, which should be made compatible with realistic scenarios in terms of economic growth and the evolution of the primary balance, and possibly on the degree to which creditors are allowed to interfere with domestic economic policy management; however, the Greek government will have to subscribe to a new conditioned programme if it intends to avoid defaulting and exiting the European Union. But will it be able to bear the political cost of such a move? The extraordinary Eurogroup meeting of 11 February will shed light on the actual leeway on this front.
The European Commission’s winter forecasts revised upwards GDP growth in the euro area to 1.3% (from 1.1%) in 2015, and to 1.9% (from 1.7%) in 2016. The revision is explained by the drop in the price of oil and the depreciation of the exchange rate. The inflation forecast, on the other hand, has been lowered, to -0.1% in 2015 (although the CPI is expected to rise back to 1.3% in 2016). The impact of QE is not priced in by the forecasts. Public finance projections point to a neutral fiscal policy in 2015 (structural budget balance unchanged at -1%, but expected to worsen by two-tenths at constant policies in 2016). Of the major countries, the one facing the worst hardships is Spain, which in th e absence of additional measures will suffer a deterioration of its structural balance from -2.1% in 2014 to -2.3% in 2015, and -2.7% in 2016. France (one of the three countries, alongside Italy and Belgium, that has made changes to its Budget laws following the Council recommendations, and which will face a review in early March) is walking a fine line, as the 2015 Budget includes a correction of one-third of a point, in the face of a required correction based on expected output gap and growth parameters in 2015, according to the new Stability Pact application grid, of between 0.25% and 0.5%. Italy seems to be better positioned, as the 0.25% structural adjustment included in the Stability Law is in line with the new guidelines for the application of the Pact. Flexibility, however, is conditioned to the implementation of an adequate structural reforms program. Next year, all the main countries (including Italy) will require additional measures (with an impact of around 0.7% for Italy, and 0.9% for Spain and France).
Quelle: BONDWorld.ch
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