Erik Nielsen's Morning Greek Update, More Vivid Imagery As Loaded Gun Becomes Full Fire Extinguisher
From Goldman Sachs' Chief European Strategist:
European Views: Summary of where we stand – and what remains to be done on the Greek package
1. Following weeks of political statements of support from European leaders (which failed to calm markets), Greek PM Papandreou telephoned the EU presidency on Thursday night to ask that the offer of help gets specified in terms of size, terms and conditions. On Saturday he told his domestic audience in an radio interview that “the question remains whether this mechanism will convince markets just as a gun on the table. If it does not convince them, it is a mechanism that is there to be used.”
2. To stay with the terminology, the European political leaders had been telling investors for weeks that there was a gun somewhere, but they never specified how many and how powerful bullets would come with it, or what the conditions would be for them to hand it over the gun to the Greeks. (Our view through all of this was that they would end up having to load the gun and actually fire it towards the end of April so as to avoid payments problems in May.)
3. Yesterday, the Europeans neither loaded the gun, not did they hand it over to the Greeks. But they did show us the bullets – and there were indeed more of them than I had thought there would be. Potentially EUR30bn for the next 12 months (in three year loans at about 5% interest rates), and up to EUR15bn from the IMF over a three year period. Unidentified officials have suggested that the EU might end up offering more money beyond the first 12 months. While impressive in size, these numbers fall slightly short of the Greek government’s estimated financing requirements, which we see at EUR51bn for the next 12 months. If the government’s fiscal plans can be implemented, then their financing requirements will be about EUR104bn (plus about EUR10bn in short term roll-overs) for the 2011-13 period.
4. Today, negotiations with the IMF starts in Brussels on their component, including the conditionality of the whole thing. This will be particularly important for the assessment of the longer term sustainability.
5. For the gun to get loaded, the 15 national parliaments (EMU, excluding Greece) will have to approve the individual loans that add up to the EUR30bn, and the IMF needs to agree on a stand-by, which has economic policy conditionality attached, and will make the first tranche of the three-year EUR15bn (or so) program available.
6. For the Greek to fire the loaded gun, they’ll have to ask the Europeans to activate the loan, and the Commission will then verify that its justified.
7. In summary, things progressed more than expected over the weekend, and we are now pretty close to a place where money could be disbursed if there were to be a run on the system. I am still thinking that it’ll be late April before the gun gets fired and the first money starts to flow – but the details of that timing is sort of irrelevant. As we have long expected, the liquidity crisis associated with April-May will be dealt with, while the longer run solvency (debt sustainability) issues are still there. Importantly, however, if the official sector really were to fully fund the Greek government for the next 3 years at an average interest rate of 4%-5%, then they’ll become the most exposed to the sustainability issue, unless, of course, they manage – formally or informally – to make their loans senior to private creditors. The next few weeks will provide more clarity on this.
And for those wondering just how much of a bailout this weekend's event are in German eyes, here is Market News with quotes from the German Finance Minister throwing cold water on optimists. The problem, of course, is that the "sell the news" part of today's market action may be delayed, as there is no news really. Which means 17 out of 18 up Mutual Fund Mondays awaits.
Greece will only receive financial aid from its Eurozone peers if it cannot meet its funding needs on financial markets
anymore, the German government stressed on Monday.
“This decision position remains unchanged,” government spokesman Christoph Steegmans said at a regular press conference here.
Finance Ministry spokesman Michael Offer said at the same press conference that “we don’t hope and don’t expect that the case [of Greece needing financial aid] will really occur.”
Steegmans compared the Eurozone aid package to a fire-extinguisher. “That the fire-extinguisher has been filled up now doesn’t say anything about the likelihood of a fire,” he reasoned.
- advertisements -