Greek turning point?

October 7, 2013

Greece will unveil its draft 2014 budget plan which is expected to forecast an end to six years of recession.

The draft will include key forecasts on unemployment, public debt and the size of the primary surplus Athens will aim for to show it is turning the corner. The government has said any further fiscal belt-tightening will not bring cuts in wages and pensions and that savings will be generated from structural measures.

If even Greece has passed the worst then maybe the euro zone crisis really is on the wane. The FT reports that billionaire John Paulson and a number of other U.S. hedge funds are investing aggressively in Greece’s banking sector, expecting it to get off its knees – an interesting straw in the wind.

However, some form of further restructuring of Greek debts – now largely held by euro zone governments and the European Central Bank – is still firmly on the cards at some point if the country is ever to get back on its feet. Its debt is due to peak at around 175 percent of GDP this year.
Berlin has ruled out “haircuts” on Greek bonds. Instead extension of repayment terms and cuts in interest rates on bailout loans are more likely.

The trigger for such a deal will be Athens’ ability to deliver a primary surplus – a surplus of tax revenue over public spending once debt interest payments are taken out of the equation – next year. In fact, sources told us last month that Greece and its lenders are close to agreeing that Athens will achieve a small primary budget surplus this year.

A source told us on Saturday that Athens is also looking into swapping a big chunk of its bailout loans with a 50-year government bond as a way to achieve debt relief once it attains a primary surplus. Repayment of EU/IMF loans is set to begin in 2025. A swap would extend repayment by decades.

With Italy’s political crisis resolved for now, Ireland declaring it needs to borrow not a cent for the rest of this year and Portuguese bond yields falling to their lowest in more than a month after the country’s international lenders approved its bailout performance, there are cautious grounds for optimism.

The big outstanding structural issue is banking union, now being held up by German coalition negotiations. ECB  policymaker Joerg Asmussen always bears listening to and may have something to say on that today. Last week, the ECB said it remained ready to flood banks with liquidity if necessary and gave a notably downbeat assessment of a “weak, fragile and uneven” economic recovery.

Mario Draghi is in Washington for the G20/IMF meetings and will deliver a number of speeches later in the week. In policymaking terms, Washington is the place to be with G20 finance ministers and central bankers gathering on Thursday. Presumably the U.S. government shutdown and debt ceiling will be top of everyone’s worry list. The ongoing U.S. standoff is keeping markets subdued but no worse than that. The counterbalance to the U.S. fiscal standoff is that investors presume the Federal Reserve will keep its money taps fully open for longer.

That has bought some respite for vulnerable emerging markets. Pravin Gordhan, finance minister of South Africa – one of the “fragile five” emerging economies seen most affected by investor flight on the expected withdrawal of U.S. monetary stimulus – speaks in London today.
We will interview Russian Finance Minister Anton Siluanov on what to expect from the meeting of the G20 which Russia has presided over this year as well as the IMF’s central and eastern European regional head.

The ECB’s gloom about the euro zone economy runs counter to the majority of recent data. Even Italy and Spain are showing signs of life according to the survey evidence, which suggests the currency bloc as a whole looks set to pretty much replicate its 0.3 percent growth in the second quarter, nothing spectacular but a sign that recession is a thing of the past.

The German economy rebounded strongly in the second quarter, growing by 0.7 percent. It might not quite match that in Q3 but it may not be far off. Does the ECB know something we don’t or is it engaged in the ongoing battle to talk down money market interest rates?

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