Feb 21st 2012, 13:52 by Buttonwood
AFTER another all-night summit, a deal between Greece and the troika (the EU, ECB and the IMF) has finally been reached. It involves the expected combination of measures - a private sector write-down, more loans from the EU in return for austerity measures and enhanced monitoring of Greek compliance. After all that effort, Greece will still have a debt-to-GDP ratio of 120%, which looks more than it can afford.
Markets have duly been unimpressed today, although of course a deal may have been priced in. But the FT story about a confidential paper on Greek finances only illustrates that this is a short-term fix and that further bailouts will be necessary.
It is hard to find an analyst who is impressed with the deal. First, there is the issue of overoptimistic forecasts. Lombard Street Research writes that
The troika assumes that the new austerity policies will improve the Greek public finances but have only a modest impact on economic growth. In their baseline scenario, GDP is expected to contract by just over 4% in 2012 and then stabilise in 2013 before growing robustly (at over 2% pa) thereafter. This, of course, is ludicrous and runs counter to all the evidence accumulated over the past couple of years.
This is probably the last Greek bailout we will see, but not for the reasons the authorities are claiming. Neither the Greeks nor the EU will have the patience for another round of negotiations once this latest package unravels.
David Owen at Jefferies points to the alternative forecast in the leaked report which sees the debt/GDP ratio in 2020 at 159% and comments that
the assumptions which feed into this are not particularly onerous - marginally weaker growth, slightly slower fiscal adjustment and less rapid pace of asset sales. And so from this leaked document comes a damning sentence which really sums up what the markets should take away from today: "With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the programme highly accident-prone."
And what kind of precedent does this set for other European bailouts? At M&G, fund manager Richard Woolnough notes bitterly that
The (deal) ensures that the private sector will suffer a real loss while the public sector (national European central banks and the ECB) will not suffer any losses. Central banks have this privileged position as they are prepared to provide further finance to Greece (akin to a rescue rights issue diluting existing shareholders). Of course, it is not in the politicians' interests for the central banks to bear any losses as a result of lending to Greece and of course it is the politicians that set the legal and regulatory framework. Not only can politicians change the goal posts, they can change the ball you are playing with. Politicians, and the authorities, are exercising their embedded power.
This deal will cause the private sector to suffer a disproportionate level of losses both in absolute and relative terms to the public sector. This punishes the private sector investor in Greek debt relative to the private speculator who was short Greek debt
Finally, there is the issue of whether Greek politicians can really impose this deal on their electorate. At Capital Economics, Jennifer McKeown predicts that
with the recession thwarting debt reduction efforts and public outrage growing, we still see Greece leaving the euro-zone before the year is out.
In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them. The blog is named after the 1792 agreement that regulated the informal brokerage conducted under a buttonwood tree on Wall Street.
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But the FT story about a confidential paper on Greek finances only illustrates that this is a short-term fix and that further bailouts will be necessary.
How does this square with banks needing a higher capital ratio in the future?
Something else to think about.
Regards
I also want to pick up on the private sector versus public sector share of the pain. The important difference in this case is that the private sector invested in Greece before the effective default on the assumption of lowish risk, while the public sector is being asked to lend money after the effective default.
We can argue whether EU states and institutions should commit money and whether they are doing it in the best way for themselves as well as Greece. One thing I am clear on is that debts prior to the default should be wiped clean and the real default should be admitted as such. Leaving a 25% obligation after the haircut does no favours to Greece, unless the creditors offer something in return. It doesn't benefit the EU states and institutions because it makes their rescue of Greece that much harder and they are likely to have to make up the difference at some point. And it doesn't fundamentally change the situation for the creditors (although 25% is obviously better than nothing).
I have the complete opposite view on this from Richard Woolnough at M&G.
Comical is it not that on the cusp of yet another "agreement" being announced, a "confidential paper on Greek finances" is leaked to the press.
This saga is beginning to resemble a low budget soap opera that is long in the tooth. Even the markets are exhibiting boredom with the latest episode.
It is time to ring down the curtain with the long overdue default and more on to the sequel, in Portugal.
Well it's time to distinguish the countries that can be saved from those that cannot. The ones that CAN be saved need to be buffered from an eventual Greek or Portugese default.
Greece almost definitely cannot be saved, and most analysts believe that Portugal is iffy.
To be fair when comparing private sector losses with the public sector one should include the fat profits the private sector made over the years by colluding with Greece and the money that the EU member states have pumped into their banks to cover Greek defaults. The losses of the hedge funds who have bee trying to game the system over the last couple of years by demanding exorbitant yields whilst expecting the whole of the Euro area to make good on junk bonds are particularly synthetic. The comparison as it stands is disingenuous.
Of course, as you have previously noted, the public sector is going to end up forgiving more Greek debt. I just wonder how we are going to end up imposing some kind of "Balkan" style administration on the country which will keep the Euro as a currency but effectively lose its right to raise funds. Surely this is a more likely outcome than an impossibly messy reintroduction of the Drachma?
Well at least this deal allows the Eurozone time to buffer other countries from a still-highly-likely chaotic default by Greece in the future.