MacroScope

Greek tragedy turns epic

By Mike Peacock
October 26, 2012

The Greek standoff continues. The Democratic Left, a junior party in the government’s coalition, could not be swayed and said it would vote against labour reforms demanded by the EU and IMF, so a deal putting Greece’s bailout terms back on track remains elusive.

Just as worryingly, Reuters secured an advance glimpse of the EU/IMF/ECB troika’s report on Greece which showed the debt target of 120 percent of GDP in 2020 will be missed (surprise, surprise) and as things stand will come in at around 136 percent. In other words, more money – up to 30 billion euros –  is going to be needed be that via lower interest rates and longer maturities on loans and/or a writedown on Greek bonds held by the European Central Bank and euro zone governments.

We know the IMF is very keen on the latter, believing that is the only way the numbers can be made to add up. We also know that Germany and others are just as resistant. Other schemes, such as Athens using privatization proceeds to buy back bonds, which has inbuilt leverage since it can do so at a quarter of their face value, may yet come into the mix but don’t alone look like they’ll make enough of a dent in Greece’s debt mountain. Athens looks set to get the extra two years it requested to make the cuts demanded of it, which also falls into the “necessary but insufficient” category.

But the headline is we are nowhere near a deal yet, and time is running short.

Following our exclusive late on Wednesday that Spain has pretty much completed its funding needs for this year and is about to get cracking on 2013, plus its assertion that international investors are returning in droves, it seems increasingly likely that Prime Minister Mariano Rajoy is going to be in no hurry to seek outside aid, not least with key Catalan elections a month away.

There are independent signs that foreign buyers are being lured back, particularly to the shorter-term debt that the ECB has said it will buy if Madrid first asks for help from the ESM rescue fund. But despite the apparent lack of sovereign funding pressure, there are counter pressures on Rajoy. Spain’s biggest bank Santander added to those yesterday, urging the government to seek a bailout after bad property debts eviscerated third quarter profit. A rise in the Q3 unemployment rate to a record 25 percent shows just how dire the real economy is.

Ireland, on course to return to financing itself on the markets, suggested its path could be smoothed by some ECB bond-buying, something which would not appear to be in line with the ground rules the central bank has laid out.

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