Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Tuesday, 27 November 2012

Eurogroup Statement in Parallel Universe


No surprise that the can has been kicked down the road (Eurogroup statement on Greece). But I’d definitely like to know what were they drinking before coming up with the “agreement”. Here is proof that parallel universes described by String theory exist. They seem to be very happy and optimistic places but somehow I can't get my brane around them.

After all the verbiage about strong confidence in Greece, the salient features of the latest grand plan are:

  1. Maturity extension for both bilateral and EFSF loans by 15 years and interest deferral on EFSF loans by 10 years. Genius. This solves the problem in one neat stroke. If there are no payments due then there is no chance of default.
  2. Lenders redirect SMP profits to a segregated account which is then used to pay them back. Was the ghost of Arthur Andersen in the advisory panel?
  3. Lowering interest rates on Greek Loan Facility (GLF) (bilateral loans provided in the first bailout) by 1%. The catch being that “Member States under a full financial assistance programme are not required to participate in the lowering of the GLF interest rates”. Spain and Italy account for 31% of the €52.9bn GLF with the former lending €6.5bn and the latter lending €9.8bn. So as soon as Rajoy and Monti take the poisoned OMT chalice, a third of the interest rate subsidy vaporises.
  4. Lowering guarantee fee costs paid on EFSF loans by 10bps. Rounding error.
Even these “benefits” will only accrue only if
  1. Greeks behave themselves. (“the above-mentioned benefits of initiatives by euro area Member States would accrue to Greece in a phased manner and conditional upon a strong implementation by the country of the agreed reform measures in the programme period as well as in the post-programme surveillance period.”)
  2. National parliaments ratify the agreement without a hitch.
  3. A grand plan to transfer taxpayer money from across Europe and the world to private creditors is elucidated (the IMF has learnt nothing from its Argentinean fiasco). At least there is a ceiling for the tender price (“tender or exchange prices are expected to be no higher than those at close on Friday 23 November 2012”).
The ridiculousness of the debt-GDP targets is obvious. From a debt-GDP of 175% in 2016, Greece is supposed to achieve a debt-GDP “substantially” lower than 110% in 2022. This requires an average annual growth in excess of 8% assuming no change in debt. Greece hasn’t achieved that kind of growth since 1996 (prior data is not maintained by Eurostat). The highest average annual growth it achieved in a consecutive 6-year period was 4.28% from 2001-2006. And this was when the global credit boom and Euro-convergence trade were at their zenith. Assuming this growth rate is miraculously achieved again, debt has to decrease by an average of 3.5% per annum. This implies primary surpluses in excess of 10.5% as interest payments currently consume about 7% of Greek GDP. Interest rate subsidies will have to lower that figure to 0 and assume the best ever primary surplus which Greece ran in 2000 is repeated not once but 6 times in a row. Truly heroic assumptions. We await the next meeting.

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