Or perhaps we should say “solution”?
Eurozone countries agreed on a bailout package for Greece after an all night session that began on Sunday, and ended on Monday just as markets were about to open. The package will be worth between €82 bn to €86 bn over three years. This sum is substantially in excess of the €50 odd billion mentioned last week, or the €30 odd billion mentioned two weeks ago before the referendum. The main difference is because an estimated €25 bn will now be required to recapitalize the Greek banks as deterioration in the state of the economy has been rapid.
This package has just been approved by the Greek government and the first instalment of legislation passed by the Greek parliament included the introduction of quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets, after seeking advice from the bailout Institutions. This bailout package will now go through up to nine creditor parliaments, including the Bundestag this Friday. In the meanwhile, the ECB announced that they have accommodated the Bank of Greece’s request to increase the Emergency Liquidity Assistance (ELA) limit, and that Greek Government Bonds may be considered for eligibility for their QE purchase programme.
Following the Greek parliament’s acceptance of the package, the Eurogroup have begun work on specific details of Bailout 3. This will include requiring Greece to reform product markets, labour markets and introduce fiscal reforms.
There will be no nominal haircuts in this package. There will be extended grace periods and maturity extensions (easiest to think of them as approaching near-zero coupon perpetuals). In separate comments the IMF has suggested that without nominal haircuts, grace periods may have to be as long as 30 years in order to get Greece’s debt-to-GDP ratio down onto a sustainable path. Such a long grace period is required because Greece’s debt-to-GDP ratio is now expected to reach an eye-watering 200%!
A substantial part of this €82 to €86 bn will consist of a €50 bn Assets Fund (to be based in Greece, operating under Greek law). State assets will be put into this Fund and the assets will either be privatized or run as on-going concerns. 50% of the €50 bn will be used to repay for the recapitalization of banks, 25% of proceeds will be used to pay down external debt and 25% of proceeds will be used for re-investment in Greece.
Bridge financing will be provided. We need to think about short term bridge financing and medium term financing. In the short term, Greece needs €7 bn in the next week, including €3.5 bn to repay the ECB on 20 July and around €2.5 bn to clear arrears due to the IMF. They will then need another €5 bn by mid-August. Due to the imminent nature of these payments, the two tranches of bridge finance will come from an EU-wide funding vehicle. This may be agreeable to non-Eurozone countries (such as the UK) provided they receive some indemnity from Eurozone governments or their bailout vehicle, the ESM. In this exchange of cash flows, the creditors will be lending money to Greece so that the latter can repay them (specifically the ECB and IMF).
In addition, Greek banks need up to €25 bn of recapitalization quite soon. They have been promised €10 bn upfront. We think this may come via a direct ESM non-marketable bond issue that is used to recapitalize Greek banks. The ESM will in turn be repaid from the privatization proceeds discussed above.
At first blush, this may be an almost total capitulation by the Greeks; a €50 bn State Assets fund is worth around 28% of GDP. How these assets will be valued remains to be seen. Privatization will not be viable when the economy is in recession (the Commission expects GDP to contract by around 2 to 4% this year) and will probably occur at a snail’s pace with much of the assets sold to overseas buyers. Hence the key issue to consider in the provision of further medium term financing is that Greece’s financing needs will substantially precede most of the privatization proceeds. Presumably, such financing will be “backed” by these privatization assets (more on this below).
Greece will lose much of their fiscal sovereignty. With up to 40 rebels refusing their support, the Syriza government may fall, perhaps not imminently, but more likely when the Greeks realise what they are giving up to foreigners.
For now, there will be no Grexit. But doubts on the Greece’s government’s ability to deliver these measures and maintain social cohesion will return to the fore and we will once again be talking about Grexit and Bailout 4. Grexit therefore is not off the table; it has merely been kicked down the road.
How much will all this ultimately cost the creditors? We do not know. It depends on the amounts that are actually raised via privatization, it depends on growth. It depends on whether Brussels can really take hold of Greece’s national assets in the event of non-compliance. We think not.
As Mrs. Merkel said, albeit with a different intended message, this is a typically European solution.
Source: Euro Summit Statement.