Fisher Investments Editorial Staff
Geopolitics, Deficits, Developed Markets

Greece Is the Word

By, 11/13/2012

Greece was the word of the day Monday, as investors waited to see whether the EU/ECB/IMF troika would release a much-needed aid tranche in time for Greece to meet a €5 billion debt redemption Friday.

No, you’re not having déjà vu. Greece really is in the same boat it was in three months ago, and it’s still waiting on the same €31.5 billion—and leaders already have a contingency plan should the troika not come through in time. This shouldn’t be the week Greece goes bankrupt, no matter what the troika does.

Which is good, because the troika still seems far from a decision despite Sunday’s partial release of its long-awaited report, which Eurogroup (eurozone finance ministers) head Jean-Claude Juncker called “positive.” With Greece’s Parliament passing another austerity package last Wednesday and a tough 2013 budget late Sunday, Greece has “delivered” on bailout terms (according to Juncker). And the troika seems to agree Greece should get two more years to implement these measures. But officials don’t yet agree on the particulars—namely, how to finance the extra €32.6 billion Greece will need to plug funding shortfalls through 2016. This was the main topic at Monday’s Eurogroup meeting, and anticipating a deadlock, officials are already planning further talks.

The disconnect apparently stems from Greece’s widening debt load. The current bailout package assumes Greek debt will shrink to 120% of GDP by 2020. However, the latest estimates peg Greek debt between 125% and 140% of GDP by then—levels the IMF considers unsustainable. The latest whispers from Brussels say the IMF’s threatening to refuse further funding requests unless there’s a credible plan to get Greek debt back to “sustainable” levels by 2020. But this likely requires a second Greek haircut, with official sector (ECB and EU member-states) creditors taking the hit—something creditors don’t seem prepared to do at the moment. The ECB has said it would violate EU treaties, and national leaders aren’t keen on forcing losses on their taxpayers. This is especially true in Germany—Chancellor Angela Merkel’s likely particularly loath to absorb these losses this close to the late-2013 election.

Now, this may sound like an epic stalemate, but for three years, leaders have proven where there’s a will, there’s a way—and there’s still ample will to prevent a near-term disorderly collapse. There are also plenty of potential solutions. For example, the IMF could compromise and give Greece more time to get its debt to 120% of GDP, wiping and re-drawing yet another line in the sand. Or EU nations and the ECB could forego interest on their Greek debt holdings or extend the maturities. The ECB has also suggested it could forego profits on its Greek debt holdings, allowing Greece to redeem maturing debt at the amount the ECB paid on the secondary market rather than face value. Greece could also buy back its sovereign debt at a discount—perhaps, according to one proposal, with revenues from pending privatizations. Thus far, the ECB and EU leaders seem supportive of this.

Officials probably won’t find agreement overnight. Maybe not even this week. But Greece is ready. The Greek Treasury will hold a €5 billion auction of one- and three-month bills to refinance the debt maturing Friday. Since the ECB accepts these as collateral in its Emergency Liquidity Assistance program, Greek banks can buy these bills, park them at Greece’s central bank, get some cash and continue going about their business, buying Greece and the troika more time to find an agreement.

As ever, there’s no magic cure for all that ails Greece and the eurozone periphery. But as long as officials keep compromising and troubled nations can continue buying time to reform their uncompetitive economies, a near-term disorderly collapse of the currency union remains unlikely.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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