Eurozone finance ministers forged a second Greek bailout deal, valued at 130 billion euros ($172 billion), which is unfortunately far from being enough as the “troika” in its leaked “strictly confidential” debt sustainability report explains.
But significant areas of concern remain despite the deal.
In fact, the only sure thing that was achieved is that the eurozone has bought some time once again.
The Greek government has announced its intention to impose a collective action clause (CAC) on its bonds before the next Greek elections take place in a couple of months.
This announcement leaves it completely uncertain if the new elected Greek government, whatever combination that will be, will comply with the pledges its predecessor has made now. The big question would become what accepting a “voluntary” haircut of more than 70 percent really and legally means.
Triggering that daunting credit event can’t be ruled out. If that happens, then the credit default swaps (CDSs) on the related Greek debt could be called on. By the way, hedge funds would be a lot better off with the so-called triggering of the CDSs. The big risk thereafter would become the CDSs that cover debt risks of Portugal, Spain, and so on.
I’m afraid the wheels could easily come off the rescue vehicles that are on the road ahead, which is full of potholes and looks more than a moon landscape than anything else.
To me, the most significant event was the leaked “strictly confidential” debt-sustainability report prepared for the eurozone finance ministers and their teams by the “troika,” which is composed of the IMF, the ECB and the EC. The report warns "unequivocally" that the balance of risks is to the downside if the Greek primary balance doesn’t rise above 2.5 percent of GDP, which is practically impossible to achieve in plain recession if not depression, from minus-1 percent in 2012, Greek debt would be on an ever increasing trajectory.
The debt sustainability report warns:
“The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline. Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalization may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays.
“On the policy side, it may take Greece much more time than assumed to identify and implement the necessary structural fiscal reforms to improve the primary balance from minus-1 percent in 2012 to 4½ percent of GDP, and concerning assets sales, delays may arise due to market related constraints, encumbrances on assets, or political hurdles. And of course a less favorable macro outcome would itself further hurt policy implementation prospects …
“The debt trajectory is extremely sensitive to program delays, suggesting that the program could be accident prone, and calling into question sustainability …
“Debt to GDP would fall to around 160 percent of GDP by 2020, well above the target of about 120 percent of GDP set by European leaders. Financing needs through 2020 would amount to perhaps 245 billion euros …
“With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the program highly accident-prone…”
In my opinion it would be delusional to get optimistic with this kind of top level “inside” information. But, of course, everybody makes up his or her own mind.
Greece, in my opinion, has already “de facto” defaulted by causing real net present value (NPV) losses of more than 70 percent to the “private” Greek debt holders. No, Greece won’t be able to climb out of its deep hole within the next decade and even, under a worst case scenario and as mentioned in the “strictly confidential” debt-sustainability report, not within a couple of decades.
In my opinion, only when Greece would become “competitive” with the other eurozone countries, which include the core, and would be able to really collect taxes, then it could be on its road to recovery. When that will be, nobody really knows. I have no faith at all that Greece can deliver on its promises in the foreseeable future. I still believe it will get worse before it becomes better. There is simply no other outcome.
So, I don’t think it’s an overstatement to say that the Greece and the eurozone as a whole aren’t out of the woods yet.
Prudent investors should keep that in mind.
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