The probability of a fourth Greek bailout

August 9, 2017


You cannot rescue a bankrupt by lending them more money. The only way to move beyond bankruptcy is to default on existing liabilities, push losses onto the creditors and thus reduce significantly the debt burden. This basic reality has been ignored by the Troika (the EU, the ECB and IMF) in its dealings with Greece because at the time of the first bailout in 2010 there was a pressing need to stabilise the euro system and above all to stabilise the German banking system which trumped all economic common sense. So a fiction was created, the fiction that if the Greeks underwent a big enough dose of painful ‘reforms’ the Greek economy would grow fast enough to allow the debt mountain to be paid off, a process planned to stretch beyond the middle of this century. Once the Troika had concocted the original Greek bailout it has had to twice supply further bailout packages and meanwhile the ‘reforms’ had shrunk the Greek economy by over a quarter, caused mass impoverishment and a huge humanitarian crisis and still could not generate a budget surplus capable of denting the debt mountain. It is politically essential for the institutions of the Troika, especially the EU, to maintain the fiction that with enough restructuring Greece will be able to pay of its debt mountain. And so as each bailout programme has failed to deliver a large enough Greek budget surplus to allow sustainable debt repayment so new bailout programs were implemented, each promising even more rigorous reforms that would allow Greece to end its dependency on Troika funding.

Greece and its creditors were quick to hail the country’s recent return to the sovereign bond market as an important milestone as it prepares for financial independence once its current bailout ends just over a year from now. For Greece to escape dependency on the Troika then it needs to be able to issue and sell bonds in the market place, like all the other governments in Europe. Until recently that was impossible because because in order to attract buyers the Greek Bonds would have had to offer crippling high interest rates. The recent successful auction of a tranche of €6.5 billion worth of bonds at 4.5% (compared to the ruinous 63% yield on Greek bonds at the height of the Greek financial crisis in 2012) was hailed in Athens and Brussels as a first step back to financial normalcy and the beginning of the end of dependency on Troika funding.

“Let’s prepare the full return to markets in summer 2018!” tweeted Pierre Moscovici, economic chief of the European Commission, which – together with the International Monetary Fund – has lent €250 billion to the country in three bailouts since 2010.

But a “full return” to markets might be optimistic. Athens faces crippling repayments almost as soon as its bailout money runs out next August: €10 billion of outstanding debts and €6 billion of interest come due in the first year, with another €20 billion due by the end of 2021. With the country only expected to run a primary surplus of €6 billion a year, Greece will need to raise extra funds to pay those bills. Many are sceptical that the country can raise enough on the market, putting a full exit from its third bailout in jeopardy.

“It is critical that there is no important bunching of maturities over the next few years to avoid any possible liquidity problems,” Antonio Garcia Pascual, chief European economist at Barclays, told IFR. “Unfortunately, there is such a bunching in 2019, and it is critically important that this is addressed soon.” Garcia Pascual believes that the looming maturities could be pushed out into the future as part of a debt relief deal for Greece, which restructured €206 billion of debt in 2012 (most of that debt was held by Greek banks and Greek pension funds and so the restructuring – a writing down of the value of the debt – helped to render both essentially insolvent). Since then, its outstanding debt pile has grown to €320 billion, or 176% of GDP.

The Greek government clearly already has the looming maturity hump in its sights. Part of its recent foray into markets included a debt swap for holders of a €4 billion bond issue maturing in 2019. Investors holding €1.5 billion of that issue agreed to swap into the new 2021 bonds. Some investors believe the swap helped swell what otherwise would have been a disappointing level of demand – €6.5 billion compared with €20 billion in a deal three years ago – offering proof that Greece would struggle to finance the looming maturities in markets. “The only reason this latest bond was a success was because of the tender offer, which amounted to half the total demand,” said Louis Gargour, chief investment officer at hedge fund LNG Capital. “Without it, the deal at €3 billion would have struggled.” “Doing the swap reduces the 2019 hurdle significantly, but clearly they have some huge liabilities coming up. Those are going to have to be addressed in other ways – debt issuance won’t be enough to fill that gap. Debt relief is an absolute necessity.”

But a deal on debt relief has so far proven elusive. The looming maturity payments, which could derail Greece’s bailout exit, might focus minds and push richer European countries, which have so far pushed back on relief, into finally doing a deal. This may be politically easier once the German election is out of the way this autumn. Complicating matters, a large chunk of the maturities facing Greece in its first three years of financial independence are to the European Central Bank and IMF, both of which would struggle politically to offer debt relief, in which case any debt restructuring would have to be financed by the EU. In 2019, Greece is due to pay off €5.7 billion of bonds held by the ECB that were exempted from the 2012 restructuring. That same year, it is due to pay off about €2 billion in IMF loans – and €2.5 billion to investors holding its 2019 bonds that didn’t do the recent swap.

With the ECB and IMF unwilling to restructure, European countries may have to shoulder the full cost of debt relief – and that might involve releasing more funds to pay off the other creditors in the so-called troika. “The ECB will insist on being made whole. For them it is a red line because [not doing so] would amount to a fiscal transfer,” said Garcia Pascual. “The politicians need to find a way around, which unfortunately for them means they may need to shoulder even more of the debt relief.” What would amount to a fourth bailout could prove difficult to stomach for some. Garcia Pascual said there is a risk that the recent success in bond markets might even be used as an argument for not helping, which could lead to a stand-off come 2019. “Politically, by going now, by demonstrating you are back and the market is rubber-stamping your policies, this government can say it has made it against all the predictions,” he said. “It also gives them more policy space to do what they need to do.” “But there are potential costs to that strategy that could come back to haunt Greece. Some countries could turn round and say they are adding debt at high coupons, the market is willing to finance them – let them go with the market, they don’t need relief.”

Yannis Varoufakis had this to say on his blog.

Why do I refuse to be impressed by the news of Greece’s return to the markets?

“It is because the Greek state and the Greek banks remain deeply insolvent. And, their return to the money markets is a harbinger of the next terrible phase of Greece’s crisis, rather than a cause for celebration”.
The above was my answer in a BBC interview on 9th April… 2014! It is also the only answer that fits today’s announcement of Greece’s new bond issue. Indeed, why script a new article, when that old post offers a most helpful response to the question: “What should the world think of Greece’s new bond issue?” (See also this article on the 2014 bond issue plus this tv interview from 16th April 2014.)

The only thing I need to add to these circa 2014 posts is this: The Tsipras government today is simply rolling over precisely the same bond that the Samaras-Venizelos-Stournaras government issued in 2014 – the subject matter of my criticism above. This is a remarkable U-turn by Mr Tsipras and his ministers. In 2014 they had sided entirely with my criticism of the then government’s argument that Greece’s return to the markets, with the issue of that one bond, was a sign the country was achieving escape velocity from the gravitational pull of its debt-deflationary crisis. Now, they are not only parroting the same arguments as Samaras-Venizelos-Stournaras but they are, lo and behold, rolling over the same bond!
I rest my case.

Meanwhile in the real world the Greek social crisis of impoverishment continues to grind down on millions of its most vulnerable citizens.

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