Monday, May 30, 2011

A Second Bailout for Greece: Some Numbers

Reuters reports that EU officials are discussing the possibility of a second loan to Greece: “EU officials said a new 65 billion euro package could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatisation program.” Why €65 billion and what does this accomplish?

Greece’s problem is that it is engaged in a race: it needs to convince markets that it has a credible plan out of the crisis by March 2012 (see here). If by that point it cannot borrow at sensible interest rates, it will be forced to default. According to the latest IMF report – which is out of date and based on deficit statistics that were subsequently revised – Greece would need to raise €26.7 billion from long-term bonds in 2012 and €37.9 billion in 2013 (see here).

These numbers, however, were also based on a very low assumption for privatization receipts: €8.5 billion in 2011-2013 (see here and here). The long-term macroeconomic framework that the government has introduced already targeted €15 billion from privatizations by 2013. To reach the higher goal of €50 billion by 2015, the government would have to do even more than that, which mean its need to borrow money would be lessened.

Now bring in €65 billion: on the surface, this money basically insulates Greece from the need to borrow long-term until 2014. However, depending on whether Greece would be able to raise sufficient funds from privatizations, and whether these receipts would be used to pay down debt or just the second €65 billion (as per the Reuters quote above), Greece could even nudge towards mid to late 2014 for when it would need to raise financing again.

According to the economic forecasts, Greece was slated to exit the recession by mid to late 2011. These forecasts showed GDP falling by 3% in 2011 but then starting to grow by 1.1% in 2012, 2.1% in 2013 and 2.1% in 2014. In other words, the crunch time for Greece to borrow again would come at a much better economic moment, making convincing markets much easier.

The added benefit would be that by 2013, the EU will have a more permanent mechanism for dealing with heavily indebted countries (if I may call them HIEC, the Heavily Indebted Eurozone Countries). However, if the troika extends another €65 billion to Greece, then by 2013, it will hold around 45% of Greece’s debt.

Readers of this blog will know that I always come back to one question: what does this mean for reform? My sense is that of all the outcomes, this helps reform the most. A default is no solution to the real problems plaguing the country (see here, here and here). An extra two years buy the government time, and they also provide an important external stamp on what it is trying to accomplish. Relieved of the pressure of having to borrow in 2012, the government can more easily plan for a full four-year term, scheduled to end in late 2013. Obviously this is all very premature – we do not know if there is indeed a second bailout discussed or what its terms may be. But overall it seems to be of the size that would be needed to insulate Greece from market forces for a few more years.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.