Markets have taken the latest Greek debt machinations in their stride. Perhaps that’s because there are bigger things to lose sleep over at the moment, such the US fiscal cliff. Regardless of the reason, Greece still matters so long as the risk of contagion from a messy default lingers.
yesterday should go a reasonable way towards reducing Greece angst for a little
while longer. At issue was the 2013
Budget showing a debt to GDP ratio reaching 190%, well in excess of the
expected peak of 167% expected just in March.
That’s due to the recession being deeper than expected on the back of ever
more austere budget measures which were on the back of the recession being
deeper than expected....and so on.
So if you thought
the target of reaching a debt to GDP ratio of 120% by 2020 was dubious in
March, it had just become a whole lot more dubious. Fortunately the “troika” (the European
Commission, the IMF and the ECB) have realised that if Greece is to move to a
position of fiscal sustainability and economic viability, a more balanced
approach is required. The authorities
therefore agreed to give Greece an extra two years to reach it primary budget
surplus target of 4.5% of GDP, shifting the data out from 2014 to 2016. That’s a positive and pragmatic step forward.
That left the
issue of how to fund the budget gap that extension would create and to move the
debt to GDP ratio to more sustainable levels over time. For that a number of solutions have been developed
to achieve medium-term sustainability within tight political (other Euro zone
countries) and operational (ECB) constraints.
include a reduction in the interest rate Greece pays on its debt and extension
of the debt maturity. Also, national
central banks are to repatriate their profits on ECB holdings of Greek
government bonds back to Greece. The
Eurogroup Communique also makes reference to Greece considering debt
buy-backs. The speculation is that the
EFSF will make cheap funds available to Greece to buy back outstanding debt at
35% of face value. The IMF is
withholding its share of the next tranche of the bailout funds until it sees
more detail on this part of the plan.
As a result the
Greek debt to GDP ratio is expected to fall from 175% of GDP in 2016 to 124% in
2020 (previously 120%) and to “substantially lower” than 110% by 2022.
The bit I still
worry about is the high degree of structural reform required in Greece,
particularly with respect to the labour market, if it is to meet the growth
projections underpinning the Budget forecasts.
It’s hard to see much progress on that front while the country remains
in deep recession. So while this package
of measures parks the Greece problem for a little while by establishing a modified
fiscal trajectory, it is not yet solved.