Greek Financial Update (avoid if you have a nervous disposition or are a member of Gilmore’s cabinet)

From The Times of London

April 26, 2010

Greece on borrowed time

No wonder George Papandreou picked the exquisite Aegean island of Kastelorizo for his live broadcast last Friday, when he finally called on the world for emergency financial help. The backdrop was the best advertisement that the Prime Minister could have found for Greece’s assets.

It’s also a long way from the protests and strikes against austerity measures that are rocking Athens and other cities.

It took him time to pull the trigger; even so, he may have to do it again.

Even assuming that this rescue is approved by Germany and the IMF, it looks like buying only a year’s relief.

That’s how long the eurozone and the IMF have to work out whether they are prepared for further bailouts, of Greece or of other members of the currency bloc yet to ask for help. George Papaconstantinou, the Greek Finance Minister, dismissed talk of default or restructuring of the debt this weekend, as did Germany’s deputy finance minister. But Greece still lacks a credible plan for repaying its €300 billion debt and bank analysts are speculating that holders of the debt may have to suffer a “haircut” of half of the value. For all the formal denials of restructuring, much legal effort is being devoted in private to trying to find terms of a voluntary restructuring that do not trigger default clauses.

However, the prime focus in the next few days is on getting the rescue package through. Under its terms, Greece would be able to draw on €30 billion of loans from eurozone members, at interest rates of just over 5 per cent. It could also draw on up to €15 billion from the IMF, at about 3 per cent — less than a third of the existing cost of its three-year money.
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There’s enough alarm about contagion to make it likely that this rescue package will go through quickly. But Greece can’t quite take it for granted. Germany, the biggest single national contributor, must put it to parliament, which faces crucial regional elections on May 9 — only ten days ahead of the next Greek repayment of an €8.5 billion eurobond. Wolfgang Schäuble, the Finance Minister, is gathering parliamentarians today in Berlin to make the case for backing the package, but the German newspapers at the weekend were brimming over with hostility to bailing out profligate Greeks and some called for Greece to drop out of the eurozone.

Nor is IMF approval automatic. The United States has a veto over IMF decisions — although it has been firmly behind the bailout talks — and there are plenty of members who may want to use the issue to make a point at Greece’s expense. More importantly, the loan doesn’t look like being enough. Axel Weber, head of the Bundesbank, has suggested that Greece’s total need for outside financing may be €80 billion. Some analysts reckon it will need three times the existing package. It may not even cover the €39 billion of debt due in the next 12 months, plus other costs entailed by this year’s restructuring plan, never mind financing needs in 2011 or beyond.

As European Commission officials have looked closely at the numbers, the position has got worse. EU officials revealed last Thursday that Greece’s budget deficit in 2009 was 13.6 per cent, not 12.7 per cent as Athens had previously stated — and it may have to be revised to more than 14 per cent.

Bond markets promptly drove yields to 12-year highs of 611 basis points above the eurozone benchmark bund before steadying at 570 and Mr Papandreou finally felt he had no choice but to call for help.

It is now clear not only that Greece lied its way into the eurozone by giving Brussels a misleadingly rosy picture of its debt, but also that, since then, its figures have been a distortion of the truth. Mr Papandreou triggered the present crisis by revealing that the deficit, at more than 12 per cent, was double the previous Government’s stated figure and more than four times the eurozone’s limit. Goldman Sachs has got off lightly, so far, in criticism from European institutions for helping Greece to disguise its true level of debt, soon after joining the eurozone, by describing loans as currency trades.

If this “sticking-plaster” rescue goes through, attention will turn to whether Greece can plausibly pay back the debt, or whether rescheduling will be necessary — and who is then most exposed. The Bank for International Settlements has reckoned that French banks have $79 billion of exposure to Greek debt, as do the Swiss, and that Germans are next with $45 billion. Greek banks own only about $40 billion of the total. But they are also vulnerable to bad debts from personal customers. They encouraged a culture of borrowing, but unemployment is set to rise and the effect will show up as defaults on mortgages and other personal loans.

Mr Papandreou and his eurozone colleagues may have bought themselves a year in which to work out how to save Greece, and perhaps Portugal and Spain, but they haven’t answered the question.