Here is another very strange, and short, document. Click to read.
It’s an update to the Greek debt sustainability analysis by IMF staff — yes one ofthose analyses again — which was originally published just before Greece’s July 5th referendum.
That DSA was dead on arrival because of what happened to Greece’s banks.
This update was for European leaders, to give a sense of how big the holes were ahead of the negotiations that eventually turned into Monday’s agreement to start talks on a third bailout.
That means two things.
One is that this reads like a “why are we still here?” document by IMF staff. The fund has been defaulted on, it has little influence on the actual politics of debt relief in the eurozone, and future loans to Greece will now have a very rough time passing the IMF board.
Secondly though, the IMF has stayed involved, given how the summit turned out (and the Greece programme technically operates until March next year once the fund is paid back).
That suggests the IMF won’t just walk away now and upend the deal.
Some more translations…
1) Firstly, a reminder of what we said in the first DSA. The bailout went badly off course in the last year. The ratio of Greece’s debt to its GDP was left broken by this, setting it on course to rise much faster than we thought.
As luck would have it, this ratio has become meaningless anyway, because we need to think more about the actual cash Greece has to pay on the Disney dollars — sorry, “debt… owed to official European creditors on non-market terms” — which money lent to it by eurozone taxpayers is turning into and which is most of the debt.
We suggested this ‘gross financing’ would be bearable if the loans were paid back in 60 years, not 30 years. You might not listen to this suggestion, but anyway we arrived at it because we’re pessimistic that anyone will want to buy freshly-minted Greek bonds, for coupons Greece can actually pay, anytime soon.
[A]s detailed in the published DSA—in view of the fact that most of the debt was now owed to official European creditors on non-market terms—a case could be made for changing from the stock-of-debt framework agreed in November 2012 to a framework focused on the path of gross financing needs. This would support the conclusion that haircuts could be avoided if instead there was a significant further extension of the maturities of the entire stock of European debt (GLF, EFSF), in the form of a doubling of grace and repayment periods, with similarly concessional terms on new financing. At the core of this conclusion is the fundamental premise that public debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates consistent with debt sustainability until debt is much lower. Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective.
2) Remember when we said Greece would need €52bn over three years? We were about €25bn out on that number.
However, it is already clear at this stage that there will be a significant increase in the financing need. The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion.
3) That’s because of the banking closure, which is now a fortnight old and counting, that has grievously damaged the economy. We actually need more time to work out how grievously. However in the meantime you can forget about the debt to GDP number — it’s going into orbit, and maybe it will peak at 200 per cent — and focus on the gross financing, because that’s now broken too. It will need fixing.
Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term.
4) A fix is a) your job and b) going to be extremely difficult with the instruments we have so far been suggesting, which have reached their limits in terms of political pushback in Greece.
Medium-term primary surplus target: Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so… The Government and its European partners need to address these concerns in the coming months.Growth: Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area… the Government— which has put on hold key structural reforms—would need to specify strong and credible alternatives in the context of the forthcoming program discussions.Bank support: the proposed additional injection of large-scale support for the banking system would be the third such publicly funded rescue in the last 5 years. Further capital injections could be needed in the future, absent a radical solution to the governance issues that are at the root of the problems of the Greek banking system. There are at this stage no concrete plans in this regard.
5) This brings us again to debt restructuring. Even now we are still not suggesting haircuts to the face value of the eurozone official loans as the first or only option. We’ll start by saying it might now be a good idea to triple, not just double, the time before Greece starts paying back the loans, and also to apply this to the new ESM loans under the third bailout.
Once again, this is because we think it will be a long time before Greek bonds are being bought again at coupons of under 4 per cent to replace, at the same cost to Greece, the official financing over time. And ultimately if things don’t work, Greece means the eurozone will be staring fiscal union in the face sooner rather than later.
There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates close to the current AAA rates before debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.
The IMF scepticism about money flowing back into the Greek bond market maybe has to be seen in the context of the approximately €20bn of private-sector financing that is being pencilled into the €86bn bailout in the next three years.
That probably is a punchy assumption.
And so to Berlin to see how an enormous maturity extension would go down…
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