Wednesday, 4 February 2015

Forgive and Forget

The Greek crisis is about the only story being covered by the financial press.  It’s the perfect seasonal pantomime not unlike Cinderella – a damsel in distress (Greece and its distressed debts) the drama of a tight deadline (Greece could run out of cash in March), comedy villains (the Trokia of the ECB, the European Commission and the IMF), a grumpy old maid (Angela Merkel) a handsome prince (Alexis Tsipras, the Greek prime minister, and his henchman Yanis Varoufakis, the finance minister).  The only questions are; where is the Fairy Godmother who might save the damsel in distress and will there be a happy ending?

George and Yanis - could this be the start of a special relationship?


The problem for Greece is in identifying the fairy godmother.  The parsimonious northern governments in the Eurozone will oppose anything that looks like a sell-out to extremists having already provided a substantial bail-out in 2010-11. The more profligate southern states have a different problem where the French, Italian and Spanish governments are strongly opposed to legitimising an anti-austerity, which would give credibility opposition parties like Podemos in Spain and the National Front in France.  So if the fairy godmother is elusive maybe we need to understand the what the act of salvation might look like.

The overall size of the debt is high -  €317bn,which amounts to 170% of GDP.  These debts have maturities on average of 16 years.  On the other side of the balance sheet the Trokia have asked Greece to run a fiscal surplus (excluding interest payments) of 4.5 per cent of GDP to keep the bail-out going - can anyone name a developed country that has run a fiscal surplus of 4.5 of GDP for 16 years.

The Greeks have been diligent in enforcing austerity to day and have achieved the primary fiscal surplus target but as some cost.  The debt to GDP ratio has rocketed from 90% to over 170% in four years and a big chunk of this comes from the enormous decline in GDP.  The Greece economy has shrunk by over 20%, that’s like losing London’s economy for the UK, imagine the trauma that would entail.

The new Greek government propose that they should be allowed to do three things:


  1. Running a surplus of only 1.0 to 1.5 per cent, instead of the 4.5%.  this would allow them to increase government spending by around 3% and given the very depressed state of the Greek economy, this may make sense. 
  2. Extending the maturity of their existing loans and having access to the continued bail-out programme.  Extending the maturity of their loans.  Whilst the Greeks have longer dated loans than other EU members (see the charts below taken from the FT) they are still by historical standards short term – extending the loan profile from 16 years to 30 years (the UK has only just finished paying off its debts from the First World War!!) they would be able to reduce the debt to GDP ratio to under 70% - a quite manageable number.  Today Greece’s nominal interest spending in 2014 was 4.3 per cent of gross domestic product, less than Italy or Portugal and with a further extension of the maturity of loans this number could become very manageable. 
  3. Revise the structural reform programme to more closely reflect the politics of the new government – less privatisations, more public investment and so on.  On the basis that they won a democratic election on this basis – this looks quite fair




The problem therefore seems to be political rather than economic.  The Southern states have a problem  - “How can the Spanish or Italian prime minister tell voters that Greece has a lower interest burden than we have, but we still need to give them debt forgiveness”.  The Germans and French have a problem with anti-European parties that would “weaponise” any leniency to Greece on debt forgiveness.

So that leaves only one major economy in the EU that could broker a deal – enter stage right the Fairy Godmother – otherwise know to me and you as George Osborne!

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