Greece Kicks The Can For The Third Time - SocGen's Take: "More Will Be Needed"

It took the charming three tries for Greece to get its third "bailout", which incidentally does not bail out anyone except the hedge funds who went long GGBs because the only actual winners resulting from yesterday's transaction - those benefiting from Europe's AAA club fund flows are hedge funds as explained previously. As for Greece, what the "deal" did was buy it more time to get its hockeystick GDP forecast in order as the only thing that may win the country some future debt forgiveness is hitting an unbelievable 4%+ current account surplus and GDP growth of a ridiculous 4.5% per year. That said, of the cash proceeds going to Greece, to be released in three tranches, totaling €43.7 billion, only a de minimis €10.6bn for budgetary financing, i.e., the Greek population (read government corruption) and €23.8bn in EFSF bonds for bank recapitalisation, read keeping German and French banks solvent. Once the €10.6 billion runs out in a few months, the strikes will resume. So what does this third, latest, greatest and certainly not last can kicking exercise mean? Simple: in the words of SocGen, a short-term reprieve has been hard bought, nothing has been fixed, and "more will be likely."

But before we present SocGen's take, here, again, is the only chart that matters: this is what Greece has to achieve in order for the the 2020 124% debt/GDP target to be hit. No comment necessary.

From SocGen's Aneta Markowska:

Greek Bailout III agreed; more will be needed

In the early hours of Tuesday, Eurogroup President Junker announced that a political agreement had been reached on Greece, offering a new paradigm of confidence, growth and debt sustainability. Combining several measures, the agreement targets Greek public debt at 122% of GDP in 2020 and below 110% in 2022. The plan did not include any outright debt forgiveness, but the door was left open for further adjustments down the road. The next step now is ratification by national parliaments with the aim to allow disbursement of the next tranche to be formally finalised on 13 December. In our opinion, this agreement should suffice to keep the Greek issue off the table until after the German election in autumn 2013, but more will likely be required to make Greek public finances sustainable.

The main measures announced at today’s Eurogroup meeting can be summarised as follows. We have drawn upon the formal Eurogroup statement on Greece and comments from the press conference.

Postponement of the target: The target to reach a primary surplus of 4.5% of GDP has been postponed from 2014 to 2016.

Enhancing Greek debt sustainability: To ensure that Greece can reach debt-to-GDP of 175% in 2016, 124% in 2020 and “substantially lower” than 110% in 2022, the eurogroup agreed the following measures. In total, the measures adopted should allow debt to be reduced by 20% of GDP, with 17pp specifically identified upfront and 3pp contingent very shortly thereafter.

1. Lower interest rate: A 100bp interest rate reduction on loans provided under the Greek Loan Facility (i.e. the bilateral loans). Member states under a full assistance programme are not required to participate (i.e. Portugal and Ireland).

2. 15 yr maturity extension and interest payment deferral: A 15 year extension on both bilateral and EFSF loans (i.e. extended from the current 15 years to 30 years) with a deferral of interest rate payments for 10 years. Combined with lower interest rates, this should save €44bn (just over 20% of GDP) according to Klaus Regling. Our own back of the envelop calculation finds a lower number, but we need to see more details.

3. Lower EFSF fee: A 10bp reduction in the guarantee fee paid by Greece on EFSF loans.  This should allow savings of €600-700mln or 0.5% of GDP by 2020.

4. Passing-on SMP profits: Member states will pass on an amount equivalent to the income from the SMP (Greek bonds purchased under the ECB’s Securities Market Programme) as from budget year 2013. Member states under a full assistance programme are not required to participate (i.e. Portugal and Ireland). This should be worth just under €10bn euros or 5% of GDP.

5. Debt buybacks: Greece is considering a programme of debt buybacks. A conservative estimate suggests that this could deliver as much as a 10pp reduction of the debt-to-GDP ratio by 2020.

Conditionality stays, enhanced by automatic correction mechanisms: Strict conditionality remains a cornerstone of the new programme and the measures to ensure debt sustainability will be delivered in a phased manner and under full conditionality. One new development is the establishment of a new toolbox of automatic correction mechanisms. The example given during the press conference was that any privatisation shortfall must be offset by an increase in the primary surplus equivalent to 50% of the shortfall amount through current expenditure cuts. Moreover, the segregated account will be enhanced for debt servicing.

Subordinated bank debt to participate in Greek bank recapitalisation process: As part of the recapitalisation of Greek banks, remaining subordinated bank debt will be asked to participate to ensure fair burden sharing.

Next steps: National procedures will now be launched and successful completion should allow the next trance of €43.7bn to be paid out with €10.6bn for budgetary financing, and €23.8bn in EFSF bonds for bank recapitalisation. The remainder will be disbursed in three sub-tranches in 1Q13 linked to the implementation of the conditionality agreed with the Troika.

The Eurogroup expect to be able to offer final approval on 13 December following review of a possible debt buy-back operation by Greece.

A positive step, but more needed

At this stage, we have yet to see the detailed numbers behind the new agreement, but are encouraged that the measures announced mark an additional step in the right direction. Our concern remains that this will not suffice to make Greek public finances sustainable and allow Greece to return to market financing in 2017. The potential for shortfalls on implementation of austerity and structural reform are one risk, but our real concern is economic growth. To date, weaker-than-expected growth outcomes explain a 37% of GDP debt overshoot. Consequently, while this plan should buy time up to the German election in the autumn of 2013, we expect additional measures to help Greek debt sustainability will be required beyond this date.

It was encouraging in this context to see the door left open at the press conference for further measures once Greece reaches a primary surplus. Also under review is the possibility to lower the Greek financing share of European structural funds. This latter measure could be a positive for growth in unlocking funds for different measures. In our opinion, something more substantial will be required, with official sector debt forgiveness a very real, but politically challenging, possibility.