Greece writes to the IMF and the European Commission

Yesterday saw an acceleration in the Greek financial crisis. It actually came on a day when there was no particularly significant economic news. But by lunchtime Greek ten-year bond yields had risen to 7.4% and the spread over German ten-year bunds was at 4 1/4%. This was in spite of the fact that a so-called rescue package for Greece had been announced by Euro zone finance ministers only last Sunday. However it would appear that yet again Euro zone ministers felt that talk would be enough and felt this strongly enough to proclaim that“ this has not yet been determined.” when asked for details on year two and three of their plan. Faced with such arrogance it is no great surprise that investors quite quickly began to worry about Greek long-term solvency and fret about the lack of detail in the plan. The fact that information had been promised from the International Monetary Fund and it was not arriving only added to investors disquiet.

What did the Euro zone Ministers hope would happen?

It would appear that they felt that promises of a deal would persuade private and institutional investors to loan to Greece at cheaper interest rates. In their world it seems that it was reasonable and conceivable that investors would immediately think that Europe had ridden to the rescue and Greek government bond yields would drop 2% to meet the 5% interest rate mooted on the rescue package. This was at best rather naive and at worst foolishness. As I wrote earlier this week (13th April) the plan had start-up  and operational problems as some European parliaments need to approve the plan, and some of the countries involved in the scheme have weak financial accounts themselves which this scheme would make weaker. As the week developed it became even clearer that the IMF was not ready to act immediately either. So the markets cogitated on these weaknesses and after only 4 days Greek bond yields rose to new highs for this crisis.

Speculators

No doubt there will be public comments again that speculators are at fault for these problems. Now there may be people who wish to exploit Greece’s problems and profit from them. However I wish to point out just one thing on this matter and look at it from the other side. Looking at the succession of promises and failed plans from Europe would you buy Greek government bonds at a yield of 5% with your own money? Looking at Greece’s problems it is quite conceivable that yields have risen not by a conspiracy to sell her bonds but that simply buyers are unwilling to purchase them until they feel that the yield compensates them for the risk.

Sadly I feel that one of the worst players in this crisis have been Europe’s politicians with their dithering and grandstanding. Actually it is this behaviour that has probably contributed the most to the rise in Greek bond yields. And a clear candidate for blame is the previous Greek government which dissembled and misrepresented Greece’s financial statistics. If you notice it is politicians  who are the most vociferous in claiming that speculators are to blame, to me they are again behaving badly on two fronts. Firstly looking for a scapegoat is usually low-quality behaviour and secondly I think it also involves a more cynical game of shifting blame from themselves.

I repeat again I am sure there probably are speculators involved and maybe some do want to harm Greece but the opportunity has been handed to them virtually on a plate hasn’t it? And the majority of players in financial markets are merely representing their customers interests.

What did the Greek government actually do yesterday?

Greece’s finance minister, George Papaconstantinou, has written to the European Commission and said Athens wanted to discuss

“a multi-year economic policy programme with the Commission, the European Central Bank and the International Monetary Fund”.

However he was also careful to say that Greece had not actually asked for help

“The programme would be supported by financial aid from the eurozone countries and the IMF – if the Greek authorities decide to ask for such aid,”

Comment

There is a potential element here of repeating the flaw in the strategy of the Euro zone Ministers. That is by saying he is only “talking” about help Mr.Papaconstantinou hopes that events will somehow miraculously improve. We have seen this strategy fail time and time again in this crisis. It goes as follows, politicians pronounce and conditions improve for a few days whilst markets draw breath, then the lack of actual substance leads to the worm in the apple of this strategy,each time Greece is left weaker after this cycle than before. This so-called cure needs to stop before it kills the patient.

Also imagine what would  happen if Greece does not follow these talks with an actual request for aid. I would say that such an act would be surprising even considering how politicians seem to have isolated themselves from reality. But it is not impossible. In my view this time Greece must  sign up to a deal.

Flaws in the plan

Even if Greece does sign up to the plan further problems with it have come to my mind.

1.Primacy. Who is in charge? Will it be the European Commission? the European Central Bank? the IMF?  If you wished to set-up something which was unwieldy and inflexible this is exactly how to do it. The IMF does sometimes co-operate with other institutions but it is used to having primacy and control.

2. Conditions. We still do not have any and we will need some. Usually this would be considered the role of the IMF but we hit point one again.

You might reasonably think that such matters would have been organised by now……..

Contagion

So far there has been little of this but the delays and dithering only increase the risks in my view. Spain has a budget deficit of 11.4% of GDP and Portugal has one of 9.4% of GDP and these look the next obvious candidates. Where they have a stronger position is that their national debts are comparatively lower than Greece’s. If you pressed me for an opinion I would say that Portugal is currently in the most danger and I say it with regret as I have enjoyed time there and have Portuguese friends.

Portugal currently has a national debt of 77% of her GDP but if you project this forward to 2012 and take a kindly view that she will hit her fiscal targets then it will be over 105%. Like Greece she is not accounting for the interest outright on her national debt, instead she is rolling it up and adding it to her debt. There is a marked lack of a fiscal austerity programme that approaches the scale of her problems.

So far neither Spain nor Portugal have been affected by anything like the problems Greece has suffered from in financial markets but then 6 months ago nor had Greece.

Conclusion

My suggestions are as follows

1.Greece should ask for the money offered

2. The IMF should be given primacy and it should set terms and conditions for Greece. Looking at its track record these will involve a further dose of austerity.

3. Greece should begin negotiations on its debt to have a technical default where there is a “haircut”. I have suggested 15% as a value for the reduction as it would put her in the position she was in a year ago. Without a change even moves one and two will not help her solvency problem and the rescue plan will eventually fail.

4. Speed is of the essence. Too much time has already been wasted.

I am grateful to the person who pointed out this fact to the Financial Times yesterday. A bailed out mortgage lender called GMAC with a credit rating of single B (junk) announced plans to issue 1 billion Euros of 5 year loan notes at 7.625%. It rather puts Greece’s position in perspective.

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10 thoughts on “Greece writes to the IMF and the European Commission

  1. Talk of speculation and profiteering from current yields I find pretty spurious. Given the contuning solvency risk,even assuming that the current package did materialise, the chances of a haircut,coupon pass or forced maturity rescheduling remain high. On that basis a Gross Redemption Yield of 7-7.5% is not an attractive premium for the risk and uncertainty involved.

    If if were not for the prospect of IMF led support these yields would be far higher.

    What is an attractive yield? Well my bloomie seems unable to produce a yield curve for Greece circa 1990’s.However a decent comparator would be Portugese Bonds,there we saw ten year yields around the 12-14% range in the mid 1990’s.I would argue the default risk to be much lower than today. Personally I wouldn’t touch Greece for a yield anything under 15%.Those yields are of course unworkable,that’s the spiral of insolvency.

    Greece has shot it’s bolt with the market.IMF and/or default.

  2. Greece is reportedly going back to the markets next week (20th April) with a €1.3Bil offering in 13 week T-Bills, (I didnt know they did them so short-term?).
    This is on the same day they also need to redeem €8.2Bil in bonds.

    You can sense that the edge of a cliff is approaching fast.

    • Hi Zak
      They do in fact go down to one month in the US and UK. For the UK the 3 month version is in fact something of a “standard” but we also have has one month and 6 month ones. I do not remember the UK having a 12 month Treasury Bill but there is no particular reason why not that I can think of apart from habit.

  3. Would love to see Germany leave the Single Currency over this debacle, would teach the New World Order Euro Federalists a lesson they wont forget!!!

    The Despotic workings of the upper echelons of the EU deserve to be disbanded, true democracy hasnt beene xercised in europe for decades.

  4. If nothing is done beforehand and they go thru with this auction on 4/20, its going to be a disaster.. and right now, that appears to be the most likely scenario. Delaying the auction isn’t much better, and is likely not an option since Greece probably needs that money to avoid default anyways. Greece needs to call in the IMF by the end of this weekend; the markets will not take lightly their inaction come Monday morning. The jig is up.

    • Call me a cynic but I was quite surprised that we didnt get another “weekly” rescue plan on Friday just in time to “reassure” the markets once again for the bond sale next week.

      Anyway, UK press on Saturday is reporting that a delegation from the IMF are heading to Greece this weekend for talks. Perhaps we will hear of another “Bailout” plan on Monday afternoon just in time for Tuesdays sale?

  5. http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7598711/ECB-heavyweight-Stark-sceptical-of-IMFs-role-in-Greece-bail-out.html

    You are right on the “Who will be in charge” question. Since when does the IMF have to follow the Eurozone rules?

    “It is sensible to fall back on the experience of the IMF But, like before, I am sceptical regarding its possible financial contribution,” Mr Stark, one of the ECB’s six-strong Executive Board, told German magazine Capital.

    “The IMF has to accept the rules of the euro zone.”

  6. Portugal is indeed a wonderful place to live. Unfortunately, it is run by spendthrifts. Added to the national deficit you need to add the many many millions of cumulative debts that many of the local Councils have accrued from the public/private companies that they have set up precisely to avoid central control and fiscalisation. In my Council alone this adds up to 8500 Euros per inhabitant. In addtion, these public/private companies are totally distorting the free market economy.

    • Portugal isn’t alone in this kind of manipulation. In the UK the Private Finance Initiative (PFI) debt owed by future taxpayers is thought by some to exceed 1 Trillion GBP. Only a tiny proportion of which is actually counted in the UK deficit figures, (as far as I am aware).

  7. It is starting to look as if Greece wants contagion so she isn’t alone and can therefore defer the needed decision making process elsewhere. That would seem the only possible explanation for the inability of her leaders to take actions in Greece’s interest.

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