The ink has barely dried on the ECB’s shock-and-awe QE program that the market’s attention has already shifted back to Greece. The election over the weekend of a new government, led by Prime Minister Tsipras, has reignited the seemingly annual debate about whether/when Greece will default on its debt and leave the eurozone.

1. Greece Lightening
The ink has barely dried on the ECB’s shock-and-awe QE program that the market’s attention has
already shifted back to Greece. The election over the weekend of a new government, led by Prime
Minister Tsipras, has reignited the seemingly annual debate about whether/when Greece will default
on its debt and leave the eurozone.
Even in a best-case scenario wherebythe government waters down its spending promises, runs a
primary surplus, obtains the last tranche payment from the eurozone and IMF and sticks to its
privatisation program, Greece faces a financing windfall of around €5bn this year according to my
estimates. With access to the bond market closed for the time being, Greece and its creditors have
little choice but to discuss the options on the table.
These include 1) ESM and IMF precautionary lending, 2) cutting the interest rate due on Greek debt
and pushing back the amortization schedule, 3) a new third bailout package, 4) a partial debt write-
off and 5) a unilateral (partial or full) default. No key decision is likely to be made for at least a few
weeks but at this early stage I think that a combination of options 1 and 2 is the most likely and
viable. It allows the new government and creditors to save face and buys both parties some time.
What happened?
The leftist Syriza party won this weekend’s Greek parliamentary elections. While it was leading in the polls,
its margin of victory was larger than expected. Specifically, the party led by Alexis Tsipras won 149 out of
300 seats and has somewhat controversially formed an alliance with the Nationalist Independent Greeks
(ANEL) which won 13 seats. The two parties disagree on many issues but are seemingly united in their
willingness to end the austerity measures imposed on Greece and renegotiate its outstanding debt.
What next?
There has been a torrent of views on what could happen, what will happen, what should not happen and
the implications for Greece, the eurozone and wider markets. The reality is that key big decisions regarding
Greece are unlikely to be made in coming days. The EU Leaders Summit on 12 February, which PM
Tsipras will attend, and the Eurogroup meeting on 16 February will likely focus on Greece and provide the
first formal setting for possible preliminary negotiations (see Figure 5).
How do the numbers stack up?
Greece has estimated financing needs of around €21bn (11% of GDP) in 2015, of which the bulk is
principal payments (around €17bn) and interest payments (€2bn) on debt due to international creditors

2. (IMF, eurozone) and private creditors. Furthermore, these payments are somewhat front-loaded as Figure
1 shows. Debt arrears are a further €2bn.
Figure 1: Greece faces a debt repayment
hump in the summer
Figure 2: The last Troika tranche paid to
Greece was in August
Source: www.olivierdesbarres.co.uk Source: www.olivierdesbarres.co.uk
The above numbers assume that Greece runs a balanced primary budget – a questionable assumption
given Tsipras’ promise to boost government spending at a time when GDP growth is still anaemic.
Therefore Greece’s financing need may be even greater.
How Greece plugs this financing need will be at the heart of negotiations in following months. Let’s look in
turn at the options theoretically on the table:
1. Access to the market
The Greek governments last tapped the bond market in July 2014 but it’s currently off limits given
very high yields in the secondary market; if the ECB starts buying Greek debt in July as part of its
QE program this may well facilitate Greece’ s return to the bond market (the ECB and eurozone
central banks currently own more than the maximum 33% of Greece’s debt they are allowed to hold
so will need to wait for some of their bonds to mature before it can buy more debt – as Figure 1
shows there are large maturities in July-August 2015).
2. Privatisation revenues
Tsipras said he would review and potentially cancel planned privatisations, putting at risk €1-2bn of
receipts.
3. Disbursement of last EFSF loan under the present bailout program (€1.8bn)
0
2
4
6
8
February March June July-August
Greece’s estimated principal and
interest payments on official sector
debt (euro billions)
0
10
20
30
40
50
60
70
80
March-June12
Dec-12
Jan-13
Jan-13
Feb-13
May-13
May-13
Jun-13
Jul-13
Dec-13
April2014
Jul-14
Aug-14
IMF
EFSF
Loans made to Greece
euro billions

3. This program expires on 28 February but the Troika has discussed the possibility of further
extending this program (by up to six months) in order to give Greece time to meet the conditions
which would enable the disbursement of this loan.
4. Disbursement of IMF Extended Fund Facility (EFF)
A €3.5bn EFF payment is due to Greece, alongside the €1.8bn from the EFSF, but again is likely to
be conditional on Greece successfully completing its next review. A further €10bn in IMF
disbursements is due in the remainder of 2015 and €2bn in Q1 2016, likely conditional on Greece
not defaulting on any or part of its debt.
5. ANFA and SMP profits
Profits, from bond holdings, distributed to national central banks and estimated at about €2bn in the
case of Greece.
So in a best case scenario – where Greece obtains the EFSF/IMF loans and ANFA/SMP profits
and sells some state assets – the government’s financing sources will total about €15bn. That leaves it at
least €5bn short and again there are a number of options being discussed.
Figure 3: Greece’s outstanding debt stands
at around €320bn or 175% of GDP
Figure 4: Germany and France are Greece’s
largest sovereign creditors
Source: www.olivierdesbarres.co.uk Source: www.olivierdesbarres.co.uk
How to plug the financing gap
1. New enhanced conditions credit lines (ECCL) from the ESM bailout fund and IMF loans. They
would amount to about €10bn each. The chairman of eurozone finance ministers, Jeroen
Dijsselbloem, has given his backing to these lending tools. Greece would have to sign a new
memorandum of understanding, which involves quite heavy surveillance by the creditors.
20527
31
56
Eurozone governments ECB
IMF Private bondholders
Greece's creditors (euros, billons)
65
49
43
29
14 7
Germany France Italy
Spain Netherlands Austria
Greece's eurozone creditors (euros, billons)

4. 2. Cutting the interest rate due on Greek official debt and pushing back the amortization
schedule, with the average debt maturity of 30 years being extended to 50 years; this option, which
would only have a limited impact on debt-to-GDP ratios in the long-run, has received backing from a
number of eurozone leaders (including French President Hollande) and outgoing Greek Finance
Minister Hardouvelis and his predecessor.
Options 1 and 2 would likely be conditional on Greece running a primary budget surplus (i.e. budget before
interest payments is in the black) and adopting the terms and conditions set by official creditors, including
further fiscal consolidation and reform. The Greek government claims that there was a €700mn primary
surplus in 2014 but creditors will want to wait for official confirmation from the EU statistical directorate
(Eurostat). Eurostat is due to publish EU budget and debt data in late April so a renegotiation of the interest
and/or maturity structure of Greece’s debt is unlikely before then, in my view.
Furthermore, creditors will want tangible evidence that the new Greek government is also committed to
running a primary budget surplus. So far PM Tsipras has provided little such comfort, instead talking up his
promises of increasing wages and government spending.
3. A full blown third bailout package, with additional conditionality. There has seemingly been
resistance to this idea from both sides of the negotiating table.
4. A partial write-off of the €320bn (175% of GDP) of Greek debt held by eurozone governments
(€205bn), the ECB (€27bn), IMF (€31bn) and private creditors (€56bn). This option, which would
significantly shrink Greece’s debt-to-GDP ratios, is favoured by Tsipras and the new finance
minister (the seventh in six years), Yanis Varoufakis. However, most eurozone leaders (including
German Chancellor Merkel) and the IMF have categorically excluded this option. Greek officials are
seemingly focussed on writing off debt held by eurozone governments and the ECB rather than debt
held by the IMF and private creditors.
5. A unilateral (partial or full) default. This is the nuclear option, with complex implications. I would
foresee likely turmoil in financial markets, Greece being asked to resign its eurozone membership
(which the Greek electorate doesn’t want based on latest polls) and adopt its own (weaker) currency
and Greece losing access to financial markets – a major problem if it doesn’t have the discipline of
running a fiscal surplus. I don’t necessarily think it would lead to other countries (e.g. Ireland,
Portugal) also seeking to exit the eurozone because ultimately for these countries the cost of doing
so outweighs the benefits.
Chancellor Merkel’s seemingly relaxed attitude about Greece potentially exiting the eurozone does
nothing to change the fact that Greece owes €60bn to Germany (see Figure 4). I don’t buy the
argument that, effectively, Germany has already written off its loans to Greece and is willing to cut
its losses.
At this early stage I think that a combination of option1 and 2 is the most likely and viable. It allows the new
government and creditors to save face and buys both parties some time.

5. Figure 5: Key dates
25-Jan
Syriza wins parliamentary elections with 149 out of 300 seats; Forms alliance with Nationalist
Independent Greeks which won 13 seats
February Greece has €1.6bn in principal and interest payments due to Troika (eurozone, ECB and IMF)
12-Feb EU Leaders Summit; newly-elected Greek prime minister Alexis Tsipras due to attend
16-Feb Eurozone Finance Ministers meeting due to discuss "state of play" in Greece
17-Feb European Union Finance Ministers' meeting
28-Feb
Greece´s two month bail-out program extension expires; last EFSF tranche of €1.8bn due to
be paid
March Greece has €3-4bn in principal and interest payments due to Troika (eurozone, ECB and IMF)
09-Mar Eurozone Finance Ministers meeting
10-Mar European Union Finance Ministers meeting
19-Mar EU Leaders Summit
24-Apr Eurozone Finance Ministers meeting
25-Apr European Union Finance Ministers meeting
Late April
European Statistical Agency (Eurostat) due to publish budget data for 2014, confirming
whether Greece achieved primary fiscal surplus
11-May Eurozone Finance Ministers meeting
12-May European Union Finance Ministers meeting
18-Jun Eurozone Finance Ministers meeting
19-Jun European Union Finance Ministers meeting
25-Jun EU Leaders Summit
June Greece has €1.5bn in principal and interest payments due to Troika (eurozone, ECB and IMF)
July-August Greece has €7-8bn in principal and interest payments due to Troika (eurozone, ECB and IMF)