One of the questions is how the land lies at the moment
with Greece’s debt in the hands of foreign institutions including the
European Central Bank.
Greece and the international representatives of the International
Monetary Fund, the European Commission and the European Central Bank,
known collectively as the troika, insist the country is on track to meet
its budget deficit goal for this year and benefit from the adoption of
bold structural reforms in the medium-term. However, the markets are yet
to be convinced this is the case judging from the kind of elevated
spreads demanded for Greek bonds and credit default swaps (CDS) and
public positions of some market gurus like Pimco’s Bill Gross or
Templeton’s Mark Mobius.
Although it is not easy to get the
pessimists to change their minds, it may not be impossible with the
right mix of economic policies, financial engineering and, above all,
political will.
Poul Thomsen, the top representative of the IMF in
Greece, acknowledged the grim market reality when his turn came during
last week’s presentation of the Greek economy to foreign investors and
analysts in London. Thomsen reportedly told the audience he knew
beforehand he could not make them change their mind that Greece would
default but he went on to make his case.
Undoubtedly, it is
unprecedented to have EU, ECB and IMF officials accompany the finance
minister of a debt-ridden country on a road show to convince foreign
funds, banks and others that the country will not go belly down. On the
one hand, this shows the international community’s commitment to the
survival of the Greek economy and, on the other, how high the stakes are
here, particularly for the eurozone and the IMF’s reputation in this
case.
Greece should take advantage of this show of support by the
international community and address head-on the main concerns of foreign
investors, that is, a protracted economic recession and a higher public
debt-to-GDP ratio in the next few years.
One should remember the
Greek economy is projected to shrink by 4 percent this year and 2.6
percent in 2011 after contracting 2.0 percent in 2009, according to EU
estimates included in the first review report on the country’s economic
program.
The general government budget deficit is seen dropping to
7.8 percent of GDP this year from an estimated 13.6 percent in 2009 and
falling further to 7.6 percent in 2011, 6.5 percent in 2012, 4.9
percent in 2013 and 2.6 percent in 2014.
But the general
government gross debt is seen rising to 130.2 percent of GDP in 2010
from 115.1 percent in 2009. It is forecast to rise further to 139.8
percent in 2011, 144.4 percent in 2012 and 145.3 percent of GDP in 2013
before starting to ease.
Although a few major banks, such as
Goldman Sachs and HSBC, see value in long-term Greek government bonds,
their recommendations are based more on relative value and the idea that
the bonds are very cheap, encompassing a generous haircut than anything
else.
It is a first good sign but not good enough to make many
investors change their minds. At this point, it looks as if the Greek
side and the troika may have to expect that Greece’s sticking to fiscal
consolidation targets and the reform program will be better received by
the the international credit rating agencies than the markets in the
next couple of quarters.
Having Fitch or Moody’s change their
outlook on Greek debt to stable from negative in the months ahead will
be another good sign which may help compress Greek spreads to July
levels or even below. However, they will not bring about the hoped-for
breakthrough either.
Greece will have to demonstrate it is able to
attract large-scale foreign direct investments (FDI) and break its
isolation from the world capital markets by having sizable inflows in
portfolio investments. These could help improve sentiment before an
expected upturn in tourist receipts by next summer.
If the economy
starts showing signs of bottoming out and recovering, Greece will have
addressed one of the major concerns of foreign investors. However, to
address the second major concern, that is, the rising public debt-to-GDP
ratio, will be more difficult. Undoubtedly, asset sales can help but
cannot drive the debt-to-GDP ratio to 100 percent or below in the next
three years as some market participants think it is necessary to
convince global funds to flock back to Greek bonds.
It is a
far-fetched proposition but some think some financial engineering could
help to reduce the debt ratio, starting with the Greek bonds held by the
ECB. According to this idea, the ECB is thought to hold some 40 billion
euros of Greek bonds with a nominal value of 60 billion and could well
increase its holdings further. The ECB could sell these bonds to the
European Financial Stability Facility (EFSF) at the current price and
the latter could issue EU-backed bonds at 60 basis points over Euribor
to finance the purchase. Next, EFSF could sell these bonds back to
Greece after providing the latter with a loan of equal size priced at
Euribor plus 250 or 300 basis points. EFSF makes money on the loan to
Greece because it earns some 190 to 240 basis points more, the ECB sells
the paper and Greece buys back its debt cheaper.
Undoubtedly this
proposition and similar ones are not a panacea. However, they may prove
more potent than they appear at first if they indeed help ease market
concerns about Greece’s sky-high debt ratio in the years ahead. There is
no question that it is better for Greece to combine prudent fiscal
policy and growth initiatives with a reduction in the debt ratio rather
than hope to access the international markets next year or in 2012,
having only to show progress on the fiscal front.
(from "KATHIMERINI" english edition, September 20th, 2010)