Welcome to the last in the current GreekWatch series, a feature launched in May when our media singularly failed to report the departure of the IMF/EU review mission from Athens when it apocalyptically declared Greece was not making sufficient progress to secure the next tranche of its first bailout. That event had the potential to plunge the EuroZone into chaos and at the very least seemed very relevant toIreland’s economic fortunes. Since then, domestic media coverage has improved to the extent that it seemed to me there was over-coverage of theGreece crisis and a few riots and petrol bombs were blown out of all proportion as RTE took the latest correspondent’s report from anAthens portrayed as being ablaze. Well, I suppose the drama increased audiences and sold news papers. The odd thing is that the media coverage has died away just at the point that we start navigating unfamiliar waters.
So where are we? As predicted here last week, the austerity and privatisation programme passed through the various stages in the Greek parliament in the past week without a great deal of drama despite the world’s media trying to ratchet up the suspense. Outside there were noisy protests and the odd fire bomb. But it seemed that this austerity plan was always going to pass –Greece is just too weak and doesn’t have enough options to resist. And yesterday evening there was a Eurogroup conference call amongst the EuroZone finance ministers including our own Minister for Finance, Michael Noonan and whilst a single minister might theoretically have vetoed the release of the next tranche of the Greek bailout, that didn’t happen. So no real drama there but that might be set to change in the next week.
The EU has effectively agreed to the release of the next tranche of the bailout. But the IMF hasn’t yet. And it was the IMF that was seeking assurances that Greece could repay its other maturing debt over the next 12 months, that was causing such problems in the past month, at least between the bailout partners. What has changed? Arguably nothing, and it might be that the IMF waits for the second Greek bailout to be agreed before releasing its €3.5bn contribution to the €12bn tranche. It might also demand a “personal guarantee” from the EU that if Greece doesn’t repay maturing debt, then the EU will meet any shortfall. All of this is unclear, but the impression emerging is that whatever it takes to avoid a Greek default now will be done by the EU. And if that means the EU meets the entire €12bn funding of the next tranche, so be it.
And what about the second bailout? Again, as noted on here last week, it is puzzling that there hasn’t been more noise. The initial plan was that the second bailout would total €120bn which would comprise €30bn of a contribution from Greece by way of additional privatisation, €30bn from private sector bondholders who might be persuaded to extent maturing Greek debt and the remainder from the EU and possibly the IMF. What could POSSIBLY go wrong with that? Almost all of it, because Greece might not readily agree to a 60% increase in its privatisation programme, private sector bondholders won’t give a cent of debt rollover unless coerced and many nations in the EU don’t believe Greece has a snowball’s chance in Tartarus of meeting the existing plan and dealing with a 160% debt:GDP. The only thing that seems certain is that Greece will need a second bailout.
In terms of the French plan for getting private sector involvement in rolling over debt, I recommend you take a look at Megan Greene’s (formerly of The Economist) assessment of the plan. Personally I cannot see how the plan cannot result in a default decision by the ratings agencies unless the debt is guaranteed by the EU. So during the coming week, expect some fireworks as the IMF is set to debate at board level the release of the next tranche. Don’t be surprised if additional guarantees are sought and given by the EU. But in all likelihood the €12bn tranche will be released by 15th July whenGreece is due to start repaying maturing debt. There will definitely be some fireworks to mark the negotiations of the 2nd Greek bailout. But for now at least it seems that the Greek crisis has receded. The IMF/EU will be back inAthens in September 2011 when this might all start again.
Meantime, it might be time to start a SpainWatch series as that country has €660bn of maturing debt in the next 24 months. New EU stress tests due in the coming weeks are expected to fail a number of Spanish banks (five of the seven last year that failed the discredited CEBS tests were Spanish) and it seems that Spanish residential property prices are beginning to decline at more realistic rates with a 5% decline in Q1 of 2011. Spanish 10-year bond yields touched 5.8% during the past week before falling back significantly to finish at 5.38%. Can Spanish banks that appear to hold €450bn of land and development loans with provisions for losses of 10% escape the fate of Ireland where ultimately 60% losses were assessed by NAMA? As noted on here a fortnight ago, we may well be approaching the citadel to the EuroZone’s ability to bailout struggling euro economies.