Greece: Troubles and hopes

Monica Defend, head of Global Asset Allocation Research and Andrea Brasili, senior economist Global Asset Allocation Research comment on Greece’s crisis recent developments

How are the bailout negotiations progressing?
Headlines report that Greece has reached an agreement with creditors on a €86bn bailout.

At the time of writing, talks are still private and no details are available; the agreement will probably include actions that Greece must pass immediately plus more measures to follow in October.

Once Athens and several European Governments pass the proposals, the ESM would be in the position to disburse the first tranche of the loan before August 20, when the €3.2bn debit with ECB
matures.

What are the major open issues around the agreement?
The main open issues are how much debt relief will be incorporated as part of any agreement, and what form it will take.

The IMF (International Monetary Fund) is strongly arguing for broad action on debt. The Fund published an updated DSA (Debt Sustainability Analysis) on June 26, and a brief but toughly worded further update on July 14.

Here the IMF explicitly said: “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

What has changed in recent weeks is that the health of both the Greek banking system and economy has deteriorated.

Financing needs are higher because there is an immediate need of intervention in support of the banking system, and GDP growth will be much lower this year and next year.

Considering the new financing needs, IMF estimated debt/GDP ratio could be around 200%, a threshold that the IMF considers as a sure “damnation”. The conclusion is clear according to the IMF, i.e., a huge debt relief package is needed. This could take the form of a dramatic lengthening of maturities (at least 30 years).

On its side, the EU Commission released an assessment of the Greek request that also analysed, among other things, debt sustainability. It highlighted in a similar vein the worsening of the situation since last year, albeit with a less negative tone than the IMF.

The UK based National Institute of Economic and Social Research (NIESR) recently concluded that in order to put Greece on a sustainable path and avoid permanent recession its debt should be cut by some 55% of GDP.

But Germany and other creditor governments have so far strongly resisted any suggestion of forgiving Greece’s debts.

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