(...)
November-December 2013: Return of the troika
Once troika monitors return from their mission to Athens, which starts this week, political leaders are expected to debate the most immediate problem with the current bailout: it is €11bn short of cash, according to IMF estimates.
In 2014 alone, Athens will need another €4.4bn on top of the existing €173bn in the programme – a number that some troika officials believe could grow to as much as €6bn. That gap must be filled by the end of the year or the IMF will have to suspend its contributions to the programme. IMF rules require a full 12 months of financing to be in place before it makes any aid payments and Greece will now run out of bailout money in the middle of next year. Although IMF officials are pushing to fill the entire €11bn hole during this review, eurozone finance ministers will probably only deal with the 2014 gap before the end of the year.
If eurozone finance ministers do not plug the 2015 gap this year, they will have to come back to it again at the start of next year. This will probably get the ball rolling for a third programme, since the EU – unlike the IMF – still has not provided any cash for the last two years of the Greek bailout, which now runs into 2016 after officials agreed last year to extend it. Some officials say that, in addition to the €6.5bn needed in 2015, another €5bn may be needed in 2016. All told, new funding needed is likely to be about €15bn.
Year end 2013: Athens balances the budget
Although it has gone largely unnoticed outside Athens and Brussels, Greece is going through one of the most significant turning points in its bailout. By the end of this year, Athens is expected to balance its primary budget, or even run a slight primary surplus – which means that it will be bringing in more in revenues than it will be spending, as long as you do not count interest payments on its national debt. Last week the Greek finance ministry said that, in the first half of the year, its primary surplus hit almost €3bn, comfortably outstripping the €2.5bn deficit it had originally projected. Although this may be good news for Greece, it puts eurozone lenders in an awkward position: once a primary surplus is reached, finance ministers agreed with the IMF to reconsider providing more debt relief for Athens, which still has debt levels most consider unsustainable.
It may not be possible to repeat such a strong showing; a €1.5bn chunk of the unexpected windfall in revenues, for instance, came from profits the ECB made on its Greek bond holdings, which eurozone countries agreed to transfer to Athens.
The latest IMF estimates show that Greece’s primary budget is almost exactly balanced, a clear sign that things could go either way. But the string of comparatively good economic news coming out of Athens in recent months – including this month’s revelation that the Greek economy shrank “only” 3.8 per cent in the second quarter, the lowest level since the crisis began and a sharp upwards revision from initial estimates – means a primary surplus is within reach.
April 2014: A tough trajectory
Although Greece may hit its primary budget surplus by the end of 2013, Jeroen Dijsselbloem, the head of the eurogroup of finance ministers, has said any discussions on debt relief will have to wait until Eurostat, the EU’s statistical agency, confirms the Greek government’s numbers in April. But if they are confirmed, one of the most complicated and politically sensitive debates will begin.
Last November, the eurogroup promised to put Greece on a trajectory to bring its debt levels to 120 per cent of economic output by 2020 and “substantially lower” than 110 per cent in 2022. But this promise may be hard to keep. Greek debt is now at 175 per cent of gross domestic product and most of it is held by the IMF, ECB or eurozone countries. So, in order to cut debt levels that much, one of these “official lenders” must take a hit, an outcome negotiators euphemistically call “official sector involvement”.
Some at the IMF believe that Greek debt cannot be lowered to 110 per cent unless OSI involves eurozone lenders accepting big losses on bailout loans, a politically combustible move. During the German election campaign, Mr Schäuble vowed not to allow such “haircuts”. Instead, EU officials are mooting a further reduction in interest rates and extending repayment schedules, which they hope will be enough. One senior EU official noted that Britain paid off its wartime loans to the US only in 2006, arguing that while extending repayment schedules may not lower overall debt levels, it can make paying it off far more painless.
Mid-2014: Money to bank on
EU officials have argued that one potential source of new cash to make up for the widening shortages in the programme sits in a pot of money that is currently unused: funds that were intended to recapitalise Greece’s banks. So far, the Greek bank rescue fund, known formally as the Hellenic Financial Stability Fund, has received €49.7bn from the eurozone’s portion of the bailout – but only about €41bn has been spent to shore up the country’s four “core” banks and wind down most of the others.
The extra cash has come, in part, because many of the banks have been able to raise private capital, something many officials believed would be nearly impossible. By using the extra €8bn-€9bn in the HFSF, some eurozone officials – including the Greek finance ministry – have argued that the overall bill for a third programme can be cut substantially.
But officials from the troika warn that Greek banks may end up needing that extra cash. The original €50bn estimate was arrived at nearly two years ago, before the Greek economy took a deeper recessionary dive than expected and before the bailout of Cyprus wreaked havoc on the region’s financial sector.
A new asset quality review and stress test of the Greek banking system are expected in the middle of next year – part of a eurozone-wide effort to set up a “banking union” complete with credible assessment of the needs of all major financial institutions. This could show that the extra cash will need to go to Greek banks after all.
Third time lucky? The latest plan to rescue Greece - FT.com
