MacroScope

Glimmer of Greek hope

By Mike Peacock
November 23, 2012

There are signs of headway from Athens where we have just snapped a government source saying the IMF accepts Greek debt is “viable” if it falls to 124 percent of GDP in 2020, rather than the 120 that it had previously decreed was the maximum sustainable level.. The source said fresh measures have been found to reduce debt to 130 percent of GDP by 2020, leaving another 10 billion euros to be covered.

At the latest failed meeting of euro zone finance ministers on Tuesday, we confirmed that the EU/IMF/ECB troika had calculated Greek debt would only fall to 144 percent of GDP in 2020 without further measures, meaning roughly 50 billion euros needed to be knocked of Greece’s debt pile. A report circulated at the meeting concluded (apologies for the number soup) that debt could only be cut to 120 percent of GDP in eight years if euro zone government agreed to take a writedown on their loans, which they will not do for now.

If the IMF will now accept 124 percent as a target that means 20 percentage points of GDP – about 40 billion euros – would have to be lopped off Greece’s debt pile. If they are now only 10 billion short, then measures amounting to 30 billion have been found. It’s hard to believe that could have come from the Greek side which has already slashed to the bone, so maybe some or all of the options we know are on the table — a Greek debt buyback at a sharp discount, lowering the interest rate and lengthening terms on the loans and the ECB foregoing profits on its Greek bondholdings – have been agreed to.

Before we get too excited, we have others sources involved in the talks confirming that the IMF will relax its target but saying a 10 billion euros gap is way too optimistic.

In Frankfurt, ECB chief Mario Draghi, hardline Bundesbank boss Jens Weidmann and German Finance Minister Wolfgang Schaeuble are cued up to speak at a banking conference so we may get some fresh insight into the negotiations. Yesterday, EU economics chief Olli Rehn was talking up the prospects of a deal being done at the next meeting of euro zone finance ministers on Monday and, key ECB policymaker Joerg Asmussen urged his own country, Germany, to compromise saying those governments which refuse to budge on writing down the value of their Greek loans must be prepared to compromise in other areas. It’s just possible compromise is now in the air.

In Brussels, negotiations at the EU budget summit broke off shortly after midnight with prospects of a deal dimming after Van Rompuy circulated a new compromise proposal that made concessions to France and Poland on farm subsidies and regional aid but made no deeper cuts in the overall spending figure, angering Germany, Britain and other north Europeans. Summit resumes at 1100.

This seems to be having zero impact on the markets – they are still basking in the glow of upbeat Chinese and U.S. manufacturing data earlier this week — but it is not unimportant. Failure to deal on the long-term budget would not put the EU in a great light.

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