Goldman On Greece: "Could Turn Into The Endgame"

From Goldman's Erik Nielsen:

Its not been a good week for Greece.  Most seriously, the news yesterday that the four biggest banks are seeking help from the government following a drop in deposits of some EUR10bn pushes them into the danger zone which could turn into the end-game unless properly addressed.  While the EU Summit spelled out how the crisis will be addressed (an IMF-led program co-financed by the Europeans), important uncertainties remain, including (1) whether the Greek government will agree to IMF conditionality; (2) how and when the European money will be disbursed and at what interest rate; and (3) whether the IMF/EU package will be big enough.

Yesterday the four big Greek banks asked for access to EUR14bn in loan guarantees from the government and EUR3bn in government bonds.  It is not clear to me what the banks can do with the guarantee given the government’s own funding problems; the bonds can be repo’ed at the ECB.  I suspect that they’ll need a greater share of the help in the form of bonds.

Good thing the IMF has arrived in Athens.  I suspect that the government and the IMF have now have had the first round of discussions on the outline of conditionality.  Conditionality will likely focus on two set of issues:

  • Structural reforms to regain competitiveness.  This is very unpleasant stuff because without a productivity miracle, it’ll include a significantly lower nominal wages in the private sector.  On our numbers, we may need to see them down by 15%-20%.  We don’t quite know how to achieve this, but it’ll include lower wages in the public sector and liberalisation of the labour market in general; combined with a period of higher unemployment.  I suspect that the government does not much like what the IMF is showing them in this area.
  • There’ll also be some requirements of further fiscal tightening.  The government’s fiscal plans for this year are pretty good, although they may need some fine-tuning.  Local paper Kathimerini reports today that several ministries and agencies are spending well ahead of plans.  Specifically, the Ministry of Economy, Competitiveness and the Marine spent 18.2% of its total appropriation for this year during the first two months, the Interior Ministry 17.4% and the Ministry of Labour  17%.  Some of the insurance agencies, including OAEE health insurance for self employed and social insurance, have disbursed 25%-40% of the budget for the whole year.  If confirmed, this would imply a need for some additional cuts on the expenditure side.  In addition, the IMF will be formulating further fiscal measures for the 2011 budget.

We’ll probably get lots of confusing noise in coming weeks on this front, but at the end of the day, I think we’ll get an IMF program (co-financed by the Euro-zone) before the end of the month.  My guess continues to be a 18-months program worth some EUR20-25bn.  The IMF will charge a bit over 3% and the Europeans probably 4%-5%.  Unfortunately, that’ll cover only a small share of the government’s total financing requirement for the 18-months, so the overall debt sustainability will hinge on implementation of the conditionality - and on a multi-year extension of concessional financing.  The combination of uncertainties in this respect and the need for continued commercial financing during the next 18 months to fill the (post IMF-EU) hole makes it difficult to see how the official sector will put the Greek concern to bed.  (But they’ll take us through May.)

Meanwhile, I look forward to today’s ECB press conference.  Trichet has the tricky task of explaining why the ECB’s introduction of a sloping scale of haircuts from January 2011 (which is virtually certain to imply higher haircuts for Greek sovereign debt) will not be bad for Greece and its banks.  As I have long argued, the answer would be an explicit indication that securities of a sovereign Euro-zone member will never lose eligibility at the ECB all together, and that the assessment of creditworthiness will be based on a broader set of (transparent) parameters than just the credit ratings agencies.  I hope they’ll go all the way, but I doubt it.