Bailout Number Three On The Horizon

BMI View: The Greek government will likely seek to negotiate a third financial bailout once the current programme expires in 2014. Although this may be relatively straightforward to secure, especially given the progress made thus far on structural reforms and the recent emergence of a primary fiscal deficit, convincing Greece's creditors to allow further debt restructuring in the future will meet with stiff resistance. We still believe that further writedowns will be necessary, but stress that the economic and financial market fallout will be more limited than in 2012.

Despite implementing a deep and wide ranging fiscal austerity programme, the magnitude of Greece's debt liabilities and the severity of the economic depression mean that additional official sector support and debt restructuring will be required in the future. We have previously argued that the troika's baseline projection of government debt falling to 120% of GDP by 2020 was extremely optimistic and unlikely to be met. While we still expect additional restructuring of some sort to take place in the coming years, we believe that the fallout in the financial markets will be more limited compared to the first official haircut in 2012. Indeed, given that the private sector took the brunt of the previous debt restructuring, the official sector (which includes the collective eurozone member states, IMF and European Central Bank) is now at risk from future restructurings.

On the back of efforts to slash state spending and raise tax revenues, the primary fiscal balance returned to surplus during the first seven months of 2013. Although debt interest payments mean that the headline balance is still in the red, the primary surplus nonetheless provides the government with some negotiating power ahead of the next IMF bailout review in September. Moreover, there is already talk both inside and outside of Greece over the need for additional financial support. Most notably, German Finance Minister Wolfgang Schauble stated on August 20 that Athens will need additional aid after the current bailout programme expires in 2014. Furthermore, Schauble indicated that Greece will face a financing gap of around EUR10bn in 2014 and 2015, which could feasibly be covered by additional financial support. There has also been increasing speculation that the interest margin charged on the bailout loans could be further reduced to ease servicing costs.

BMI View: The Greek government will likely seek to negotiate a third financial bailout once the current programme expires in 2014. Although this may be relatively straightforward to secure, especially given the progress made thus far on structural reforms and the recent emergence of a primary fiscal deficit, convincing Greece's creditors to allow further debt restructuring in the future will meet with stiff resistance. We still believe that further writedowns will be necessary, but stress that the economic and financial market fallout will be more limited than in 2012.

Despite implementing a deep and wide ranging fiscal austerity programme, the magnitude of Greece's debt liabilities and the severity of the economic depression mean that additional official sector support and debt restructuring will be required in the future. We have previously argued that the troika's baseline projection of government debt falling to 120% of GDP by 2020 was extremely optimistic and unlikely to be met. While we still expect additional restructuring of some sort to take place in the coming years, we believe that the fallout in the financial markets will be more limited compared to the first official haircut in 2012. Indeed, given that the private sector took the brunt of the previous debt restructuring, the official sector (which includes the collective eurozone member states, IMF and European Central Bank) is now at risk from future restructurings.

On the back of efforts to slash state spending and raise tax revenues, the primary fiscal balance returned to surplus during the first seven months of 2013. Although debt interest payments mean that the headline balance is still in the red, the primary surplus nonetheless provides the government with some negotiating power ahead of the next IMF bailout review in September. Moreover, there is already talk both inside and outside of Greece over the need for additional financial support. Most notably, German Finance Minister Wolfgang Schauble stated on August 20 that Athens will need additional aid after the current bailout programme expires in 2014. Furthermore, Schauble indicated that Greece will face a financing gap of around EUR10bn in 2014 and 2015, which could feasibly be covered by additional financial support. There has also been increasing speculation that the interest margin charged on the bailout loans could be further reduced to ease servicing costs.

Resistance To Further Debt Writedowns

However, for the time being there remains intense resistance within the eurozone towards a further writedown in debt, particularly from Germany which is the largest creditor among the member states. German Chancellor Angela Merkel has been quick to rebuff claims that further haircuts will be required, a stance which will be repeated to wary taxpayers in the run up to the federal elections in September. That the Chancellor has faced criticism from her opponent Peer Steinbrueck in recent weeks over her handling of the debt crisis, further suggests that the government will vociferously oppose further concessions to Athens. That said, if Merkel secures another term as we expect (potentially as part of a grand coalition) then opposition to additional restructuring may subside in the coming years. In addition to the current opposition to debt restructuring, there is also little in the way of support for using funds from the European Stability Mechanism (ESM) to recapitalise Greece's struggling banks. The initiative, proposed by Greek Finance Minister Yannis Stournaras, has been struck down by Schauble who opposes retroactive recapitalisation. With banks across the eurozone due to repay previous funds allocated through the European Central Bank's long-term refinancing operations (LTRO) by end-2014 and early-2015, it is likely that funding stresses will re-emerge for periphery banks. As such, some Greek banks are likely to require additional financial support in one form or another.

Even before negotiations begin on a third bailout programme, Athens is already having to contemplate further politically toxic measures to placate its creditors and safeguard financial stability and the incipient economic recovery. In particular, there are growing demands for Greece to agree to transfer state-owned real estate assets into a foreign registered holding company, most likely situated in Luxembourg. Despite the government's efforts in implementing controversial austerity measures, there has been a persistent reluctance to ramp up the privatisation of state assets, which has been a requisite for external financial support. In a bid to speed up the privatisation programme, the troika proposes that Athens allow foreign asset managers to oversee the sale of residential property, although the Greek government will still effectively have control of its assets. It has also been indicated that the holding company will issue bonds that will further help to stabilise the national debt. Although the programme could help free up billions from asset sales, it is likely to prove unpopular with the Greek government and the electorate. Indeed, given that the initial privatisation programme was criticised for effectively 'selling of the family silver', handing over the reins to foreign asset managers would be even more unpopular.

Further controversy comes from plans to allow banks to pursue property foreclosures. Since the financial crisis erupted banks have been prevented from foreclosing on properties, with the temporary freeze being extended several times since being introduced in 2010. Given the substantial deterioration in household purchasing power, perniciously high unemployment and highly uncertain incomes, the forced removal of families from their homes risks igniting a fresh wave of demonstrations and protests. This in turn would undermine the government and jeopardise the recovery in key industry sectors such as tourism. We still believe that the current coalition comprising PASOK and New Democracy will endure, but warn of the threat of defections by individual party members would further weaken the government following the previous departure of the Democratic Left.

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Sector: Country Risk
Geography: Greece, Greece, Greece, Greece
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