The IMF/eurozone engineered rescue package will not be enough to save Greece from defaulting

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http://www.pcgwm.com/
Greece will not be saved from a default (chapter 3)
1. Greece budget assumptions and projections
Greece Stability and Growth Program is based on the following assumptions:
I note that all discussions are centered around the baseline scenario, which is overly
optimistic. As the SGP plan dated January 2010 outlines (emphasis mine):
“For more than ten years the Greek economy experienced high GDP growth
rates... was however largely based on increases in demand, fuelled by the easier
availability of credit to enterprises and households at the lower interest rates
which accompanied the adoption of the euro”.
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http://www.pcgwm.com/
This leads me to 2 conclusions:
(1) How do the Greeks expect to have a positive nominal GDP growth when the
economy is still uncompetitive and tax increases and wage / pension freeze (at best) are
going to weigh on an economy which has been geared for so long towards consumption?
(2) The euro has not been an instrument of convergence but of divergence since
interest rates did not reflect the competitiveness of each eurozone country but a melting-
pot hiding large discrepancies and not providing any incentive to converge due to the lack
of stringent enough and automatic rule’s enforcement of the Stability Pact.
Beyond more fiscal and social austerity measures, has Greece any additional revenues they
could fund? I see two sources: selling state owned assets estimated to represent EUR 9.2
billion (figure rather optimistic to obtain when you are a well-known distressed seller) and
multi-years pre-payment of EU structural funds (everything is possible in Brussels to save
face - it would be counterproductive and disastrous for the EU credibility on the world
stage).
Overall, it will not be enough.
2. SGP execution
Prima facie, the implementation of the SGP is going rather well with a 39% decrease in the
budget deficit for Q1 2010 vs Q1 2009, but the evil is in the details:
• First, 45% of the progress comes from a deep reduction in the Public
Investment Program which, by the way, is due to slightly increase for 2010;
at the current monthly spending, Greece is EUR 6 billion behind. So do not expect
any improvement to come from this item; to the contrary, there is a lot of catch up
to do by the end of the year to reach the EUR 10.3 billion spending contained in the
SGP.
• Second, interest payments are zooming up. The subsidy that Greece will
receive from its eurozone partners will however limit the negative aspect of this
item
• Third, the primary expenditure is making very slow progress
• Fourth, the EUR 870 million special levy on profitable firms was mostly
collected in January
• Fifth, payment of EU EUR 1.4 billion structural funds is being
accelerated
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3. Markets & Beyond projections
It is quasi- impossible to project the success or failure of the SGP measure being
implemented or the additional cost of any deviation in unemployment numbers from
projections. What is less difficult to assess is the reality of GDP growth and therefore the
level of debt requirements and whether the eurozone and IMF subsidy will be enough or
not.
I do not believe one second that Greece will have a positive growth in 2010;
commentators and analysts are broadly discussing about a 4% GDP contraction.
I started with the SGP numbers and I applied 2 different nominal GDP growth factors
under 2 scenarii: one taking SGP alternative scenario and one with less optimistic GDP
figures. In each case I calculated the additional debt and cost of interest at 5%, assuming
that eurozone members will be willing to continue financing at subsidized rates...
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SGP alternative scenario: the debt/GDP ratio continues deteriorating, whilst at a slow
pace. This is obviously overly optimistic since any negative delta compared to the baseline
scenario would translate in lower tax revenues which are not taken into account in
Markets & Beyond calculation. The additional debt is rather sustainable in 2010 and
2011 marginally and increases the debt/GDP ration for the 4 years under review. I do not
take on-board this scenario either.
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http://www.pcgwm.com/
Markets & Beyond scenario: the situation is unsustainable and the GDP
projections are quite aggressive and do not take into account lower tax receipts. This will
result in a default that would occur at the latest in H1 2011 (and probably by March
20 or May 18 2011 when two bonds are maturing – EUR 8.6 and 6.6 billion) but for
additional financing from the IMF and other eurozone countries (it was reported last week
that Axel Weber, the Chairman of the Bundesbank, said that EUR 80 billion would be
required in 2010). Either Greece will default abruptly (not my scenario) or its debt
payment rescheduling / will be negotiated (my scenario).
Conclusion
The rescue package, if finally delivered (watch Germany), will not be enough to
plug the widening gap; it is merely buying time and any reprieve will be short lived.
The EU, the IMF and Greece should prepare a managed default and start
discussing with creditors, which are mainly European (this should facilitate negotiations),
to reschedule the debt and the haircut they will need to take (in my view in the 50% region
to make the debt burden manageable for Greece and be within the 60% zone of the
Maastricht criteria).
Sources:
Hellenic Ministry of Economy and Finance
http://www.mnec.gr/en/
Hellenic Ministry of Economy and Finance: Accounting Office
http://www.mof-glk.gr/en/home.htm
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