Tag Archives: Bond buyback

Hold the applause

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BRUSSELS – What a difference a few months makes. It was not so long ago that Antonis Samaras – as opposition leader – was being shunned by pretty much all his fellow conservatives at European People’s Party meetings in Brussels but Hungary’s Viktor Orban, who was fighting his own futile battle against the International Monetary Fund in Budapest, while Samaras tilted at troika windmills in Athens.

They were more sole mates than soul mates. But now that Samaras is prime minister, he’s made an 180-degree turn, agreeing to troika demands and working hand in glove with eurozone leaders who had previously kept him at arm’s length. On Thursday, Samaras received enthusiastic applause from his peers at the EPP meeting in the Belgian capital.

Thursday proved to be quite a day for Samaras’s morale as the long wait for the eurozone to approve Greece’s next loan tranche ended. Euro-area finance ministers agreed the release of 49.1 billion euros, which, along with another 3.4 billion, means Athens is due to receive 52.5 billion euros by the end of March.

Of this, 34.3 billion is to be disbursed next week: 16 billion euros will go toward bank recapitalization, 7 billion for budgetary financing and 11.3 billion to finance Greece’s bond buyback program. French Finance Minister Pierre Moscovici insisted this was no “Christmas present” for Greece but recognition of fiscal and reform efforts that had been made over recent months and come at some cost for the Greek people.

“This will allow Greece to exit the crisis standing, not on its knees,” Samaras said of the release of further bailout funds following the completion of the buyback of more than 30 billion euros in Greek government bonds, reducing the country’s debt by almost 10 percent of GDP.

Samaras indicated that the release of the funding was a vindication of his strategy to drop the intransigence he displayed in opposition in favor of total cooperation with the country’s lenders.

The release of the funding certainly gives his three-party coalition government a little breathing space, particularly as most of it – some 40 billion euros – will be allocated within Greece to complete bank recapitalization, pay state arrears of around 9 billion euros and cover the declining budget deficit. This is significant as it is a complete reversal of the way that bailout funding has been allocated so far, with close to 80 percent of the money Greece received exiting the country to repay existing debt.

The government is banking on its tactic of meeting the fiscal and legislative demands made by the troika paying off. The release of the funding, Samaras hopes, will to some extent address the lack of liquidity in the Greek market. His thinking is that if banks gradually resume normal activity, and state suppliers – as well as ordinary citizens – are paid the money they’re owed by the state, then businesses will be under less pressure and jobs will stop disappearing.

“This is the end of the decline,” said Samaras on Friday, although he added that recovery would not be straightforward. “It will be an uphill process.”

Samaras is betting his, and his government’s, future on the hope that the positive impact of the next disbursements and structural reforms will outweigh, or at least counter, the negative impact of the continuing recession (a contraction of 4.5 percent has been forecast next year), rising unemployment (already at the 25 percent mark) and the overall gloom that pervades the country. It is a massive gamble that will face a number of serious challenges.

One will be the need for Greece to keep to its reform commitments. Without this, the process could derail very quickly as the next loan tranches are dependent on bailout “landmarks” being met and an automatic fiscal adjustment mechanism kicking in if spending and revenues targets are missed. While the legislative part of reforms has largely been completed, the implementation still lies ahead. This is the main reason that Finance Minister Yannis Stournaras has been cautious in welcoming the release of more funds. “The journey starts now,” he said on Thursday.

Another challenge is the sense of political instability that is being created by the crumbling of coalition partner PASOK, the firming up of support for SYRIZA, the continuing menace of Golden Dawn and the implosion of Independent Greeks. In this environment, it will be very difficult to focus the public debate on the need for reforms or to call for patience.

However, Thursday’s decision also poses another, unexpected, challenge as it was revealed that the 11.3 billion euros Greece is borrowing from the European Financial Stability Facility would be coming out of the 109 billion euros that make up Greece’s second bailout.

While the eurozone had never said this money would come from elsewhere, when the second bailout was agreed in March, there was no indication that borrowing for a future buyback would come from this package. Could this create a cash shortage further on down the line? Will it have a damaging impact on the process to reduce Greek debt to 124 percent of GDP by 2020, thereby satisfying the IMF that it’s sustainable?

On this, there were no concrete answers but there were suggestions that the process of reducing Greek debt did not end with the bond buyback this week.

The clearest indication was Samaras’s reference in Friday’s news conference to the possibility of the cost of the 48 billion euros for the recapitalization of Greek banks being taken on by the European Stability Mechanism rather than being recorded as national debt.

Greece’s premier was buoyed by the agreement to create a single supervisory mechanism (SSM) for the EU’s major banks. Germany, among others, insisted that this supervision be in place before the ESM could issue funds to support eurozone banks. The Germans, and the other AAA-rated countries in the euro, also added another obstacle by saying that an ESM recapitalization could not apply to “legacy assets” – debt that had been built up before the ESM was created.

This announcement in September appeared to kill any hope of Greek recapitalization costs being passed over to the ESM. However, Samaras’s comment indicates the EU position on this issue may be softening. If taken in the context of the statement by Eurgroup chief Jean-Claude Juncker on Thursday – suggesting that additional measures to bring down Greek debt might not be needed – then it appears that the possibility of the ESM covering recapitalization costs is still alive.

Considering that the impact of such a move on reducing debt would be 2.5 times that of the recent buyback, it is clear that this is a goal Greece will have to pursue closely.

Certainly, such a move would give Samaras’s claims that Greece is turning a page added conviction. It would also lift lingering doubts about Greece’s future membership of the euro, which Stournaras admitted have not disappeared as a result of decisions taken this week but are only “beginning to disappear.” It would have the potential to act as a spur for investors and be a genuine driver for growth and job creation. Who knows? It might even earn Samaras another round of applause.

Nick Malkoutzis

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Goodbye uncertainty, hello uncertainty

For Greece, the underlying theme of this crisis has been swapping one set of uncertainties for another. In fact, sometimes the uncertainties have been exactly the same, simply repackaged and rebranded. From George Papaconstantinou’s “loaded gun on the table,” to the first bailout in May 2010, from the mid-term fiscal plan in the summer of 2011 to the October 27 haircut agreement last year, from the PSI and second bailout early this year to the European assurances ahead of this summer’s elections: each development has promised stability, continued membership of the euro and better days ahead; each has crumbled into an empire of dust.

Now, hopes are being pinned to the Brussels debt deal agreed in the early hours of Tuesday morning. The immense relief at an agreement being reached is both understandable and justified. The prospect of the eurozone and International Monetary Fund failing to find any common ground on how to make Greek debt sustainable would have led to potentially devastating economic and existential implications for the single currency area and Greece. However, as this relief subsides, it becomes more evident that this deal takes a stab at providing a definitive solution to Greece’s debt problem but falls short, leaving the sword of Damocles dangling over the country. Even if the debt reduction program goes according to plan – and there are doubts whether it will, especially due to questions over the bond buyback scheme – Greece will still have to contend with a debt of 124 percent of GDP in 2020. It is also doubtful whether enough has been done to remove the niggling doubts about Greece’s future in the minds of investors, who are so necessary to helping change the course of the Greek economy. JP Morgan referred to the Brussels pact as a moment of “creative ambiguity.”

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One giant leap for Europe, one small step for Greece

Illustration by Manos Symeonakis

A general rule emerged from the financial crisis that originated in the USA a few years ago: If a financial instrument is too complicated to understand, then you’d better start worrying about how safe it is. So, when one of the world’s leading economists, Paul Krugman, writes of the deal for Greece agreed by eurozone leaders on Thursday, “If you aren’t confused, you aren’t paying attention,” then perhaps we need to put the champagne on ice.

Thursday was undoubtedly a landmark moment for the European Union and the single currency. It was never an inevitability that eurozone leaders would arrive at a deal. When you have 17 leaders with 17 different electorates and myriad domestic concerns to juggle along with worries about the future of the euro, there can never be a guaranteed outcome. Nevertheless, the eurozone chose on Thursday the road to a possible solution rather than the path to an almost certain dissolution. The danger has not been dispelled but more time has been bought.

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