Debunking Elements of Greek Deal

Factbox: Key elements of the Greek debt deal with the euro zone and IMF | Reuters.

As I discussed in previous posts, this deal is merely a cynical ploy to delay making a real decision on Greece until after German elections in the fall. Despite what European leaders are saying, this deal neither puts the Greek crisis behind Europe nor offers the Greek people a fresh start.  Reuters reported the elements of the deal in bold; my comments follow each point.

Greece will reach a primary surplus target of 4.55 percent of gross domestic product only in 2016, rather than 2014, to give the economy a better chance to start growing again.

This target is based on unrealistic assumptions of increases in Greek growth and in tax revenues. Greece will never achieve a primary surplus of 4.55% by 2016.

Greece will organize a debt buy-back of its bonds held by private investors. The buy-back will take place by Dec 12.

The bond buy-back is merely a way to cosmetically enhance Greece’s debt burden today at the expense of the future. The bonds have an excellent interest rate, and no financial adviser would ever suggest that Greece retire them.

Once the buy-back yields a positive outcome, the IMF will join the program and the euro zone will consider the following…

That statement means exactly what you think it does. We can be back at this point two weeks from now. The buy back is contemplated at 35 cents on the euro, so all should go well. However, this is Greece we’re talking about.

A cut by 100 basis points in the interest rate on bilateral loans to Greece under the first bailout, reducing the rate to 50 basis points above financing costs or Euribor. Ireland and Portugal do not have to cut the interest because they themselves receive aid.

This action really does reduce Greece’s indebtedness.

The euro zone’s temporary bailout fund, the EFSF, will cut its fees charged on loans to Greece by 10 basis points.

So does this one. The Eurozone is finally taking rational steps to solve the Greek debt crisis rather than making cosmetic improvement that reek of cynicism.

Maturities of loans to Greece, both bilateral and from the EFSF, will be extended by 15 years.

Oops, I spoke too soon.  Extending the maturity of the loans ensures that the Greeks will spend an entire generation in debt hell.

Greece will not have to pay interest on loans received from the EFSF for 10 years.

The interest will still accrue and be capitalized over the 10 years. See my comment above.

Profits from the European Central Bank’s Greek bond portfolio, acquired during the bank’s Securities Market Programme (SMP) will be handed over to Greece for debt servicing from the budget year 2013 onwards. No amount was given in the statement of the Eurogroup, but a euro zone source said this amounted to 11 billion euros.

This action will help Greece; however, the ECB has paper profits on its Greek debt. It will have to sell these holdings to realize the profits, and the assumption is that Greek debt prices will remain stable during this process. If Greek debt falls in value, less than €11bn will be realized.

Euro zone countries will consider further measures and assistance, including a further interest rate reduction on bilateral loans to Greece to help Athens reach debt sustainability when Greece reaches a primary surplus and meets all the conditions in the reform program.

As you can see, Germany still has its foot on Greece’s throat. These considerations should not matter, because Greece will have defaulted on its debts by 2016.

Greece’s debt-to-GDP ratio is to fall to 175 percent in 2016, to 124 percent in 2020 and substantially below 110 percent in 2022.

Any Greek goal is based on unrealistic troika assumptions regarding future economic growth. According to their forecasts, Greece will average over 4% economic growth from 2015 to 2024. Good luck.

Euro zone countries will continue to finance Greece until it regains market access, if Greece sticks to the agreed reform program.

Even if they do not stick to the reform program, the Eurozone countries will continue to finance Greece through German elections. As we speak, the ECB continues to allow Greece to finance itself through the ELA program.

Greece will get a tranche of aid of 34.4 billion euros in December, of which 10.6 billion will be for budget financing and 23.8 billion for the recapitalization of banks. A further 9.3 billion euros will be disbursed to Greece in three sub-tranches in the first quarter of 2013 if Athens meets reform milestones set by the lenders.

Since there are three sub tranches in the first quarter, expect three exercises in political brinkmanship in the coming months.

This plan merely delays the inevitable Greek default. Merkel hopes that the deal will hold everything together until after she stands for reelection.

Do not discount the Greeks. They are very resourceful, and there is no reason why they can’t run out of money before then. At the very latest, we will be back to the bargaining table for a fourth Greek bailout one year from now.











2 thoughts on “Debunking Elements of Greek Deal

  1. Nice rundown!

    There was a post on Zero Hedge last night stating that this agreement still have to be approved by each of the Eurozone’s countries parliament. Is this condition accurate?

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