Goldman's Erik Nielsen On Why US Taxpayers Will Soon Burn Tens Of Billions To Delay The Greek Bankruptcy

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A very much downcast Erik Nielsen shares why the soon to be revised IMF/EU 3 year €150 billion (up from €40 billion) Greek bailout will be a waste of taxpayer money. And here is why American taxpayers will soon have to pony up to make sure Greeks can retire at 61. "I suspect that some haggling is now going on between the IMF and the Euro-zone on the burden sharing of a bigger program, but I rather doubt that the Europeans can do more than the already announced EUR30bn for the first year.  If so, I suspect that the IMF will have to settle for something like a 12-months fully funded program worth a total of EUR50-55bn (or could it be an 18-months program worth some EUR80bn?)." Yet, as even Erik points out, this is just more US money thrown out. "even a fully funded program for 12-18 months imply important risks and could lead to debt restructuring.  First, while the government will be fully funded, the private sector, including the banks, maybe still find financing at affordable rates difficult to come by.  Second, there is a risk that the government will not meet the performance criteria and hence lose the promised official financing, and third, what comes after the fully funded program?  If the situation is unsustainable now, it’ll take one heck of a policy program to make it sustainable in three years following more debt at interest rates well above the likely nominal GDP growth rate." All is good though - remember the Bernanke Directive #1: If an action results in the imminent weakness, suffering, pain or death of the dollar, with (preferably) or without the elimination of the US middle class, pursue such action with enthusiasm and vigor, in perpetuity.

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Update from Washington: Greece and more.

After a couple of days of meetings here in Washington, these are my updated thoughts post IMF spring meetings:

  • My impression is that the official thinking on Greece has shifted in recent days, possibly caused by market reactions.  While they have long rejected the idea of a debt restructuring out of fear of contagion, to avoid that outcome two things have now become clearer to the officials:  (1) the program will need to be “fully funded”, i.e. the market has to be taken out of the equation for some time; and (2) the Greek program, partly because of the need for a sizable (15%-20%) decline in nominal wages, will need to be much longer than the originally envisaged three years.  On my numbers, a one-year fully funded program needs to provide a minimum EUR50-55bn; an 18-months program will require some EUR75bn, and a 3-year program a minimum EUR150bn.  I think the latter numbers is out of reach even for the present political environment of generosity, so the debate is between EUR55bn and EUR75bn.  I suspect that some haggling is now going on between the IMF and the Euro-zone on the burden sharing of a bigger program, but I rather doubt that the Europeans can do more than the already announced EUR30bn for the first year.  If so, I suspect that the IMF will have to settle for something like a 12-months fully funded program worth a total of EUR50-55bn (or could it be an 18-months program worth some EUR80bn?)  Regardless, it’ll be presented as a 3-5 year program potentially worth even more in terms of headline number, but look out for the degree of conditionality attached to future disbursements, as well as to possible double-counting as the early money will be rolled into a second program.

 

  • The underlying assumption will be that during the first 12-18 months, which will be fully funded by official sources, Greece (and Portugal, Spain and others) will implement sufficient reforms to make it possible to gradually return to the market during years 2-5 as the official financing begins to gradually fade away.

 

  • For the IMF to increase their share, they’ll probably insist on the Europeans committing their money up front.  The Spanish government will approve its €3.7bn share of the package this coming Friday (but it’ll still take about a week more to disburse the money as they first have to go borrow it.)  The Spanish government will do it through a fast-track piece of legislation according to which the government approves the loan and parliament validates it within a month.  Other governments will take longer, so I suspect that work is being done on a bridging facility, maybe by the BIS.

 

  • The authorities are calling on the IMF staff in Athens to conclude negotiations by Friday.  Whether this is feasible, I don’t know, but it makes an announcement by Friday possible.  Maybe its more likely during next weekend.  However, as I have argued before, rather that focusing on the actual loan number, investors should focus on the conditionality attached because that’s what will determine the sustainability of the program.

 

  • If I am right on the above, then the IMF-EU dealing with the present liquidity issue will be more pronounced and longer than I had originally envisaged.  However, my longer term concerns on Greece remain, namely my doubt whether the domestic political and social fabric can withstand the reforms that are needed to simultaneously cut the deficit while restoring growth.
  • In other words, even a fully funded program for 12-18 months imply important risks and could lead to debt restructuring.  First, while the government will be fully funded, the private sector, including the banks, maybe still find financing at affordable rates difficult to come by.  Second, there is a risk that the government will not meet the performance criteria and hence lose the promised official financing, and third, what comes after the fully funded program?  If the situation is unsustainable now, it’ll take one heck of a policy program to make it sustainable in three years following more debt at interest rates well above the likely nominal GDP growth rate.

 

  • I hope I am wrong, but I kind of doubt it – so this needs to be watched very carefully.

 

  • Beyond Greece, there is a certainty deflated feeling here in DC with respect to the IMF proposals of a globally coordinated bank taxation.  The differences between the US and Canada were not resolved, while Europe – oh good old Europe – never made it to centre-stage because of the lack of intra-European agreement.

Stay tuned.
Erik F. Nielsen
Chief European Economist
Goldman Sachs