Greece needs yet another bailout
- 22 October 2011
- From the section Business
The current European Union and International Monetary Fund plan to revive the Greek economy and its finances has failed.
New alarming forecasts of Greece's escalating debt, made by experts working for the so-called "troika" of the European Commission, the European Central Bank and the IMF - and which have been presented to European leaders and finance ministers meeting in Brussels this weekend - cannot be seen in any other way.
The unavoidable implication is that the IMF will not provide any more bailout finance for Greece unless there are much bigger write-offs of Greek government debt by private sectors lenders to the country than the 21% already agreed - which raises the spectre of Greece defaulting on its debt unless banks and investors concede that they will reduce what they're owed by up to 60%.
It means that European leaders face an even more challenging task in coming day to agree a package of rescue measures for the eurozone that would be seen by investors and by non-eurozone countries such as the US and China as sufficiently bold and comprehensive.
As the Financial Times, which first published details of the shocking analysis, points out this morning, the troika paper talks of the need for banks and investors to agree to be repaid 50% or 60% less than the face value of what Greece owes them.
Because of the potential destabilising impact of these write-offs on the health of banks, the paper contains this bizarre footnote: "the ECB [European Central Bank] does not agree with the inclusion of these illustrative scenarios concerning a deeper PSI in this report".
To translate: PSI stands for "private sector involvement;" which in turn is a euphemism for reductions or discounts, or "haircuts," on what the private sector is owed.
But note that the ECB, which is Greece's single biggest creditor, does not dissent from the devastating forecasts in the report that Greek GDP growth will be 7 1/4% lower between now and 2020 than was expected back in July and that proceeds from Greek privatisations will be 20bn euros less than anticipated.
Under these conditions, the troika economists say that Greek sovereign debt will peak at an alarmingly high 186% of GDP in 2013 and decline only to 152% of GDP by the end of 2020. Even in 2030, Greek sovereign debt would still be 130% of GDP - double the ratio that most would argue is a sensible, sustainable ratio of debt to GDP.
And by the way, the troika experts have by no means made extreme assumptions to make a point. They say GDP and real wages could contract much faster than they expect, which would see the ratio of debt to GDP peaking at an almost incredible 208% of GDP.
Here's the painful conclusion for all of Greece's creditors, both private sector lenders and official lenders, such as European governments and the IMF: to reduce Greek government debt to just above 120% of GDP by the end of 2020, private-sector lenders would have to reduce what they're owed by 50%, while there would have to be further loans to Greece of 114bn euros from the IMF and by the eurozone's bailout fund.
However, if it was decided that a more prudent aim would be to cut the debt to a still high 110% of GDP in nine years, that would require new official loans of 109bn euros and a 60% debt writedown by banks and investors.
What's more, the additional loans required from the IMF and eurozone could be as high as 440bn euros under worst case assumptions.
So what's gone so horribly wrong? Well this is how the troika boffins put it:
"The situation in Greece has taken a turn for the worse, with the economy increasingly adjusting through recession and related wage-price channels, rather than through structural reform-driven increases in productivity".
Or to put it another way, Greece's austerity programme is succeeding in impoverishing Greek people with little in the way of discernible benefits to the Greek private sector and the capacity of Greece to start earning its way in the world.
The protesting mob in Athens would probably not dissent from that view.
Update 10.43: The strengthening of Europe's banks, so that they can withstand potential losses on loans to heavily indebted eurozone countries - such as Greece, Italy, Spain, Portugal and the Irish Republic - is top of the agenda for discussion by European Union finance ministers at their meeting today.
Tense negotiations are expected over how much capital Europe's big banks will be forced to raise, to provide shock absorbers against these possible losses.
I am told the aggregate amount should now be more than 100bn euros - following complaints from countries like the UK that some eurozone regulators were not being rigorous enough in assessing the weakness of banks in their respective countries.
The European Banking Authority, the supreme banking regulator for the European Union, had originally estimated that EU banks would have to raise around 200bn euros of new capital, to meet its target that all banks should have capital equivalent to 9% of their risk-weighted assets (on a so-called Basel 2.5 basis, and after reducing the value of loans to struggling eurozone governments to the market price).
But when national regulators were asked to go back and apply this target to assess what their respective banks would actually need to raise, the aggregate of all these calculations emerged at around 80bn. euros
"Some regulators have been captured by their banks," said an European official. "They are far too cosy with them, and don't put enough pressure on them to own up to the weakness of their balance sheets."
Some governments, such as the UK's, see 80bn euros as too low to be credible. They fear that anxious investors won't believe that Europe's banks have been strengthened sufficiently.
So there are now attempts to force a more rigorous analysis of banks' frailties on all national regulators.
Finance ministers hope there will be an agreement on all this today. However the detail of how much each bank will have to raise - from investors, from their governments or from the eurozone's bailout fund - is now highly unlikely to be published by the EBA this weekend.
The point is that the strengthening of the banks will be seen by investors as more or less adequate, depending on what agreement is reached by eurozone leaders on how and how much to boost the financial firepower of the bailout fund, the European Financial Stability Fund.
A deal on enhancing the EFSF is proving elusive, because of a bitter divide between France and Germany on the mechanism.
But unless and until the EFSF has sufficient funds in place to cover the potential borrowing needs of hugely-indebted governments such as Italy's, it will be impossible to assess whether Europe's banks are sufficiently protected against the risk of loss on their loans to the likes of Italy.
Or to put it another way, the rescue measures for the eurozone have to be seen as an interlinked package: they are only credible as an ensemble, rather than as isolated initiatives.