There’s a general view out there that with private creditors having agreed their 50pc haircut, the “Greek problem” has been solved, at least for now. Unfortunately, it has not.
According to Reuters, an unpublished “Compliance Report” by EU executives has concluded that Greece will have to impose a further fiscal squeeze in 2013/14 amounting to some 5.5pc of GDP in order to meet the targets that underpin the second international bailout. The chances of Greece being able to do this are about zero, though that is my conclusion, not that of the report.
According to the report, the austerity measures already adopted by Athens should be enough to bring the primary deficit down to the agreed 1.5pc this year. However, “current projections reveal large fiscal gaps in 2013-14”. The projected shortfall is reckoned to be about 5.5pc of GDP. All this, of course, assumes that Greece achieves the output levels forecast by the Troika, the chances of which are again about zero. So infact, the required squeeze will be even larger, further undermining growth and digging an even deeper hole.
Unabashed, the report states that “substantial additional expenditure cuts will have to be announced and adopted by Greece in the coming months, in particular when Greece updates its medium-term budget in May 2012”.
Where is Greece expected to find these cuts? Further savings in welfare payments, pharmaceutical spending, defense and restructuring of central and local administration are said to be under discussion. Has anyone told the Greek electorate, which is due to go the polls next month, about this? Apparently not.
Menacingly, the report adds that continuation of international financial assistance can only be expected if policy implementation improves.
A second bailout from the eurozone and the International Monetary Fund worth €130bn was finally agreed on Monday, which in theory should keep Athens financed through to the end of 2014. However, the money is to he drip fed, with later tranches dependent on meeting the troika programme. Spain has had its deficit target for this year reduced, so the eurozone has shown itself to be flexible. But Spain isn’t in the programme. The treatment meted out to those in receipt of financial assistance may be somewhat harsher.
This is what Citigroup had to say about developments in a note published on Tuesday morning:
With the last night’s decision, the 2nd Greek bailout package is finally on its way. However, in order to get the full disbursement of this package Greece has to implement the requested austerity measures and structural reforms, which will be monitored on a quarterly basis by the Troika. Given Greece’s poor track record on implementing such measures and particularly in view of the uncertainty over whether a new Greek government (after the election, which probably will take place at the end of April/early May) will go ahead with these measures, it is very uncertain if Greece will meet the Troika requests and will get the full programme funding. Taking into account large extra liabilities in 2012, as recently reported by the IMF, and because our expectations for economic growth for Greece are much weaker than the Troika’s, the expected debt-to-GDP ratio of 117% for 2020 looks far too optimistic to us. As a consequence, we continue to expect further debt restructuring in Greece at a later stage and see the probability of Greece leaving the euro area at around 50%.
Actually, I’d put the chances at way above 50pc. The only question is when. Regrettably, it looks as if the whole miserable mess is going to keep us in column inches for quite a few more months yet.