Shavasb Bohdjalian
German news magazine Der Spiegel reported on Sunday that the new Greek bailout under negotiation could end up costing more than EUR100 bln. Spiegel cited estimates by experts from the German Finance Ministry and the "troika" of the EU, International Monetary Fund and European Central Bank. Greece agreed its first, 110 billion-euro, bailout a year ago. But this assumed that it could resume borrowing commercially early next year, which now appears inconceivable.
So far, Athens has received EUR43 bln under the first bailout, although it urgently needs another EUR12 bln which had been due in late June to cover debt repayments and for its day-to-day running costs. The troika said on Friday that money should now be forthcoming in July.
Euro zone finance ministers and the IMF board must still back the new bailout, which would supersede last May's rescue.
A source close to talks on the bailout involving EU officials in Vienna last Thursday said the breakthrough on the new funding would involve some participation of private investors. Greek banks, holding most of the Greek debt will be asked to voluntarily roll-over maturing debt, thus allowing foreign banks to be repaid in full. Hopefully, Cypriot banks will also be allowed to ask for repayment of their maturing loans and not be forced to roll-over the maturing debt.
By asking only Greek banks to agree to a voluntary debt rollover, at least officially, there will be no haircut and thus no default. This also allows an agreement in principal for a new programme that will effectively fund Greece until mid 2014, covering a total financing gap of around EUR85bln.
An accelerated programme of privatisation is expected to raise EUR25bln leaving around EUR20bln to be raised from the private sector, presumably with Greek banks expected to accept swapping their existing Greek bonds for new 10-15 year notes.
As Soc Gen economists noted, a deal of this nature would materially reduce the uncertainty surrounding Greece’s immediate funding needs and therefore clear the way for the ECB to hike rates in July.
According to previous press reports investors in the new bonds may be given preferred status, higher coupon payments or collateral as incentives to roll their exposures of Greek debt maturing between 2012 and 2014. Negative incentives are also under consideration, such as cutting off old Greek bonds from eligibility for use as collateral with the ECB while granting that privilege to new bonds.
In return for the additional funding, Greek Prime Minister George Papandreou is promising to implement the government’s Medium Term Fiscal Strategy which basically calls for additional austerity measures that the Troika identified as being required in March’s third programme review in order to bring the programme back on track. The MTFS budget plan will include EUR6.4bln of new savings this year as well as a further EUR22bln of savings to be made over the years 2012-15.
Greece will still be left with a huge mountain of debt at the end of programme –estimated to peak at around 170% – which will do nothing to allay the market’s concerns that a restructuring of Greek debt cannot be postponed indefinitely. However for now European officials appear content to kick the can down the road.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
