World First briefing note: The problem with Greece Jeremy Cook Chief Economist
WF briefing note: The problem with Greece (Apr 2015)
Jul 15, 2015
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World First briefing note:
The problem with Greece
Jeremy Cook Chief Economist
What’s going on? Negotiations between Brussels and Greece are not going well The Greek government is unwilling to put forward a plan in keeping with Syriza values Brussels unwilling to relax previously agreed bailout conditions Decisions on sales-tax increases, pay cuts and public sector job losses need to be made and ratified
Another bailout?
Greece is unable to raise longer-term funds at competitive interest rates – see table below
Borrowing for 3 years at 29% and 30 years at 10% is another road to ruin
Cash levels
Media and market reports seem to show that Greece had around EUR7bn cash on hand at the end of February
With monthly debt repayments (of debt and to the IMF) of around EUR1.3bn, Greece would effectively be out of cash by end of May, beginning of June
Repayment timeline & key events
Date What's happening? Sum cash repayment / Outcome
24-‐April Eurogroup mee0ng of Finance Ministers in Latvia
End of April Wages and pensions payments of EUR1.7bn due
01-‐May IMF payment of EUR200m interest due
Total repayment in May = EUR1bn
08-‐May 6 month bond maturing worth EUR1.4bn
11-‐May Eurogroup mee0ng of Finance Ministers
12-‐May IMF repayment of EUR780m due
15-‐May 3 month bond maturing worth EUR1.4bn
05-‐Jun IMF repayment of EUR310m due
Total repayment in June = EUR1.7bn
12-‐Jun 3 month and 6 month bonds maturing worth EUR3.6bn in total
12-‐Jun IMF repayment of EUR350m due
16-‐Jun IMF repayment of EUR580m due
18-‐Jun Eurogroup mee0ng
19-‐Jun 3 month bond maturing worth EUR1.6bn
19-‐Jun IMF repayment of EUR350m due
End of June Deadline for agreement on new debt programme
10-‐Jul 6 month bond maturing worth EUR2.0bn
Total repayment in June = EUR1.7bn
13-‐Jul IMF repayment of EUR465m due
17-‐Jul 3 month bond maturing worth EUR1bn
20-‐Jul Bond to ECB matures worth EUR 3.5bn
What needs to happen by June 30th?
June 30th is the deadline for a deal and additional bailout funds to include:
1. Less onerous austerity measures but updated reforms 2. Debt relief by extending tenor, reducing interest on loans 3. Brussels oversight of reforms and cash upon criteria being met
Without this we are staring down the barrel of ‘Grexit’ though I maintain that the probability is less than 30%. Why?
Greece would need to walk away from a deal or be driven by unrealistic demands from creditors and European desire for a break-up is minimal
A likely domino fall would be such as found on the next slide
Grexit – possible timeline*
No deal agreed on June 30th. Funding to Greek sovereign and banking sector dries up, capital
controls introduced
Referendum on Eurozone membership called, no vote wins, defaults on debt (if not
done already)s
New debt issued under local law, prin0ng of a new
drachma begins
Greece exits the Eurozone with dras0cally weakened currency,
economy and debt levels
* A lot of hypothe0cals within this model
Grexit – what happens to Greece?
Any new currency would be subject to a sharp devaluation. Based on similar revaluations in recent years (Thailand, Argentina, Russia, Korea, Mexico, Iceland)
Also hyper-inflation, local default by companies & widespread recession
0% 10% 20% 30% 40% 50%
1 month
3 months
1 year
3 years
5 years
Percentage loss seen in currency crises
Grexit – what happens to the rest of the Eurozone?
An impact, but a modest one. Kneejerk weakening of EUR. Expect GBP and USD bought as havens
Remains under the protection of the European Central Bank which would likely create a strong policy response. This could
be via additional QE or direct cash to sovereigns by purchasing debt directly
Bigger issue is philosophical – wasn’t the Eurozone meant to be irrevocable?
Losses to governments are outlined below
Grexit – Possible contagion elsewhere
A Greek exit from the EZ sets a precedent and probably would raise investors’ fears of contagion elsewhere
The imposition of capital controls could spook depositors in other periphery countries
At the margin, I think that the response of the ECB would be enough to prevent widespread contagion
Conclusions While a Greek default on its debts is likely in the short term without additional support from the EU/ECB/IMF, a Greek exit from the Eurozone is not guaranteed. A Grexit should be avoided as it would ruin Greece. The effects within the Eurozone are painful and would trigger support from the ECB and governments. At the margin, I think that the response of the ECB would be enough to prevent widespread contagion and other central banks would be quick to support the global economy.
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