Ares
11th May 2011, 06:42 AM
Get ready, sports fans. The next few weeks and months will be packed with Greek debt action. We present you, our Loyal Readers, with a handy scoresheet. Print it out and post it on your wall.
The Problem: The €110 billion EU-IMF bailout is not enough money for Greece. It never was. The original bailout math in May 2010 showed Greece would need €53.2 billion to cover deficits, €88.3 billion to repay existing long-term debt and €10 billion to prop up banks through mid-2013. That’s €151.5 billion. To plug the hole, the EU presumed Greece would borrow more than €40 billion from private markets.
The numbers have only gotten worse. In the most recent analysis, the EU added €4.9 billion to the deficits that will need to be financed. The current estimate is €44.1 billion in long-term borrowing to fill the gap, of which €26.7 billion should come in 2012. Almost no one believes Greece will be able to raise that much money; currently, markets want more than 15% to lend to Greece, and S&P rates its bonds deep in junk territory.
There’s not much time: The Day of Reckoning is likely March 20, 2012, when Greece must pay back a €14.4 billion bond.
The Solutions: There are at least four possible options.
1.) Modify, wait and hope. Make some tweaks to Greece’s bailout package and hope they are enough–or close enough–to give Greece more time to regain market confidence. What tweaks could be made?
Lowering the interest rate on Greece’s bailout loans. Greece, after a rate cut, will now pay around 4.5% for its euro-zone loans (the IMF rate can’t realistically be touched). At the beginning of 2012, Greece will have around €57 billion in euro-zone bailout loans outstanding. If the euro-zone countries were willing to make the loans completely interest-free, a huge step, Greece would save just €2.5 billion in 2012.
Giving Greece more time to pay back the bailout loans. This is already in the works. But it will have no effect on 2012, since no bailout loans come due in 2012. (Some €10 billion will be due in 2013.)
Plowing ahead with privatization. There are ambitious plans to realize €50 billion from privatization of state assets by 2015. But how much could be realized in the coming months? Hard to say, but likely not very much.
The figure of €26.7 billion in required new borrowing in 2012 could probably be fudged a bit by speeding up bailout-loan disbursements. But the total planned bailout disbursements in 2013 are €8 billion.
Eliminating interest entirely and pulling all the 2013 disbursements into 2012 would close the gap by €10.5 billion–not even halfway. Barring a massive amount of very fast privatization, this route looks impossibly difficult to achieve by March 20.
(A wild card: Short-term debt. We’ve excluded it from our calculations, on the theory that it is cashed out and reissued in a continuous flow mostly through local banks. The EU assumes that too. It’s not a terrible assumption, given that the Greek banks are relatively healthy–at least compared to their Irish counterparts. But Greece could close the gap a bit by issuing somewhat more short-term debt than it redeems each year. The EU’s revised bailout calculations actually do this; net short-term debt issuance over the period of the bailout in May 2010 was estimated at €1.1 billion; in the most recent update, it is €5.7 billion. Perhaps this could be stretched further? But there’s surely a limit.)
2.) Give Greece more money. The EU’s temporary bailout fund, the EFSF, could just write a check. That would plug the gap very quickly. Of course, voters in Germany, Finland, the Netherlands and elsewhere would not be happy. And it wouldn’t do anything to change the fundamental upward direction of Greece’s debt pile. Moreover, some €35 billion in long-term debt is due to be paid back in 2012. So the taxpayers of euro-zone countries would be borrowing money to lend to Greece, a very risky credit, so that it could pay back other borrowers (i.e., private banks) in full. Not likely to be politically popular.
3.) Demand that private creditors hold off on getting theirs. Greece could be told to offer a “voluntary exchange” to its private creditors, whereby they turn in their maturing bonds for new ones that are repaid later. There’s a risk: If not enough borrowers sign up for the deal, the voluntary exchange could quickly become involuntary, which is far messier. Plus, just putting off repayments doesn’t reduce Greece’s total debt burden–nor its mounting interest burden. Last year, interest payments ate up 14% of government revenue.
Some quick arithmetic suggests that the EU might be able to scrape by without giving Greece more money in 2012, if all or most of the long-term bondholders whose debt comes due that year (holding about €35 billion) agree to postpone repayment.
But it’s a tight squeeze: Telling existing bondholders that there won’t be any fresh financing makes them less likely to agree voluntarily to suspend repayment. If there isn’t enough interest, the EU will have to write another check.
4.) Take the “haircuts” now. Most economists believe Greece won’t be able to repay its €350 billion (and growing) debt. Getting it under control thus requires forcing private investors (and possibly the public lenders) to accept that they won’t get fully paid back–the dreaded “haircut.” If it is inevitable, doing it sooner rather than later limits the impact on public lenders, and thus taxpayers. But no one knows exactly what this step would do to the banks that lent to Greece, and by extension the broader European banking system.
But even this option will almost certainly mean Greece’s needing more bailout money. A haircut will bar it from private markets for a while. It’ll need public money as long as it’s still running deficits.
http://blogs.wsj.com/brussels/2011/05/10/a-greek-debt-scoresheet/
The Problem: The €110 billion EU-IMF bailout is not enough money for Greece. It never was. The original bailout math in May 2010 showed Greece would need €53.2 billion to cover deficits, €88.3 billion to repay existing long-term debt and €10 billion to prop up banks through mid-2013. That’s €151.5 billion. To plug the hole, the EU presumed Greece would borrow more than €40 billion from private markets.
The numbers have only gotten worse. In the most recent analysis, the EU added €4.9 billion to the deficits that will need to be financed. The current estimate is €44.1 billion in long-term borrowing to fill the gap, of which €26.7 billion should come in 2012. Almost no one believes Greece will be able to raise that much money; currently, markets want more than 15% to lend to Greece, and S&P rates its bonds deep in junk territory.
There’s not much time: The Day of Reckoning is likely March 20, 2012, when Greece must pay back a €14.4 billion bond.
The Solutions: There are at least four possible options.
1.) Modify, wait and hope. Make some tweaks to Greece’s bailout package and hope they are enough–or close enough–to give Greece more time to regain market confidence. What tweaks could be made?
Lowering the interest rate on Greece’s bailout loans. Greece, after a rate cut, will now pay around 4.5% for its euro-zone loans (the IMF rate can’t realistically be touched). At the beginning of 2012, Greece will have around €57 billion in euro-zone bailout loans outstanding. If the euro-zone countries were willing to make the loans completely interest-free, a huge step, Greece would save just €2.5 billion in 2012.
Giving Greece more time to pay back the bailout loans. This is already in the works. But it will have no effect on 2012, since no bailout loans come due in 2012. (Some €10 billion will be due in 2013.)
Plowing ahead with privatization. There are ambitious plans to realize €50 billion from privatization of state assets by 2015. But how much could be realized in the coming months? Hard to say, but likely not very much.
The figure of €26.7 billion in required new borrowing in 2012 could probably be fudged a bit by speeding up bailout-loan disbursements. But the total planned bailout disbursements in 2013 are €8 billion.
Eliminating interest entirely and pulling all the 2013 disbursements into 2012 would close the gap by €10.5 billion–not even halfway. Barring a massive amount of very fast privatization, this route looks impossibly difficult to achieve by March 20.
(A wild card: Short-term debt. We’ve excluded it from our calculations, on the theory that it is cashed out and reissued in a continuous flow mostly through local banks. The EU assumes that too. It’s not a terrible assumption, given that the Greek banks are relatively healthy–at least compared to their Irish counterparts. But Greece could close the gap a bit by issuing somewhat more short-term debt than it redeems each year. The EU’s revised bailout calculations actually do this; net short-term debt issuance over the period of the bailout in May 2010 was estimated at €1.1 billion; in the most recent update, it is €5.7 billion. Perhaps this could be stretched further? But there’s surely a limit.)
2.) Give Greece more money. The EU’s temporary bailout fund, the EFSF, could just write a check. That would plug the gap very quickly. Of course, voters in Germany, Finland, the Netherlands and elsewhere would not be happy. And it wouldn’t do anything to change the fundamental upward direction of Greece’s debt pile. Moreover, some €35 billion in long-term debt is due to be paid back in 2012. So the taxpayers of euro-zone countries would be borrowing money to lend to Greece, a very risky credit, so that it could pay back other borrowers (i.e., private banks) in full. Not likely to be politically popular.
3.) Demand that private creditors hold off on getting theirs. Greece could be told to offer a “voluntary exchange” to its private creditors, whereby they turn in their maturing bonds for new ones that are repaid later. There’s a risk: If not enough borrowers sign up for the deal, the voluntary exchange could quickly become involuntary, which is far messier. Plus, just putting off repayments doesn’t reduce Greece’s total debt burden–nor its mounting interest burden. Last year, interest payments ate up 14% of government revenue.
Some quick arithmetic suggests that the EU might be able to scrape by without giving Greece more money in 2012, if all or most of the long-term bondholders whose debt comes due that year (holding about €35 billion) agree to postpone repayment.
But it’s a tight squeeze: Telling existing bondholders that there won’t be any fresh financing makes them less likely to agree voluntarily to suspend repayment. If there isn’t enough interest, the EU will have to write another check.
4.) Take the “haircuts” now. Most economists believe Greece won’t be able to repay its €350 billion (and growing) debt. Getting it under control thus requires forcing private investors (and possibly the public lenders) to accept that they won’t get fully paid back–the dreaded “haircut.” If it is inevitable, doing it sooner rather than later limits the impact on public lenders, and thus taxpayers. But no one knows exactly what this step would do to the banks that lent to Greece, and by extension the broader European banking system.
But even this option will almost certainly mean Greece’s needing more bailout money. A haircut will bar it from private markets for a while. It’ll need public money as long as it’s still running deficits.
http://blogs.wsj.com/brussels/2011/05/10/a-greek-debt-scoresheet/