26 September 2012

Funding the gap: Where next for Greece?

By Matthew WallBusiness reporter, BBC News

Extra borrowing over a longer period could bring more economic pain

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Eurozone crisis

• Eurozone inches towards bank plan
• Do summits work?
• Q&A: Bailout fund
• Eurozone and you

Mythologists might say Greece is navigating a treacherous course between Scylla and Charybdis, the twin perils that threatened to destroy the hero Odysseus.

More prosaically, we might say the debt-burdened country is stuck between a rock and a hard place.

To qualify for the next 31.5bn-euro (£26.6bn) tranche of its 130bn-euro bailout it needs to deepen its already drastic austerity measures.

With this aim, Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras have just finalised their long-awaited debt reduction package worth 11.5bn euros, with another 2bn euros expected to come from tax revenue.

But even they admit this is unlikely to be enough.

Now they just need to get the plan past the fractious coalition government on Thursday, not to mention the troika of inspectors from the European Union, the International Monetary Fund (IMF), and the European Central Bank (ECB), due in Athens on Sunday.

Meanwhile the people are rebelling, with Wednesday's 24-hour general strike just the latest in a long series of protests against the strong medicine being imposed by the eurozone authorities.

How much more pain can the people take?

If the troika does not approve the plan and agree that Greece is making sufficient progress reforming its finances, it means no more eurozone bailout funds.

And without bailout funds the country faces likely bankruptcy, ejection from the euro and social chaos.

Emergency funding

Worryingly for Greece, troika approval is by no means guaranteed, with reports suggesting that the IMF will not agree to the debt reduction plan unless the government commits to reducing the country's debt level to 120% of gross domestic product by 2020.

Campaign posters in Athens during the general strike read SOS

Greece has already asked for a two-year extension to the terms of its bailout. But funding this extension could cost an extra 15bn euros,Finance Minister Yannis Stournaras told Reuters on Tuesday.

Who would plug the extra funding gap and how?

In the game of pass the debt parcel, no-one wants to be left holding the package when the music stops.

The IMF is reportedly worried about becoming stuck as a long-term funder of the country, when its primary remit is to provide short-term, emergency funding.

So in Washington on Monday, IMF head Christine Lagarde suggested that eurozone countries may have to take a haircut on loans they have made to Greece, agreeing to write off part of what they are owed.

In addition, the ECB might also have to take losses on the estimated 40bn-euro worth of Greek bonds it owns.

"The Greek debt will have to be addressed," she said.

Michael Hewson, senior market analyst at CMC Markets, agrees: "Either the eurozone lenders, the IMF and the ECB take a haircut on their Greek debts or they have to let Greece leave the euro - it's a straight binary choice," he told the BBC.

State financing

Greece had certainly been hoping the ECB would help ease the pain by extending the maturity of its Greek bonds.

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Crisis jargon buster

Use the dropdown for easy-to-understand explanations of key financial terms:

Troika

Troika

The term used to refer to the European Union, the European Central Bank and the International Monetary Fund - the three organisations charged with monitoring Greece's progress in carrying out austerity measures as a condition of bailout loans provided to it by the IMF and by other European governments. The bailout loans are being released in a number of tranches of cash, each of which must be approved by the troika's inspectors.

Glossary in full

But the ECB could be unwilling to take the hit and Germany in particular is opposed to giving any more financial aid to Greece.

ECB executive board member Joerg Asmussen, speaking to German newspaper Die Welt on Tuesday, said: "The ECB would not be able to take part in any such restructuring because this would constitute state financing, which is forbidden."

If Mr Asmussen reflects the view of the ECB board as a whole, his response is a slap in the face to Greece and a rebuff to the IMF as well.

So if the ECB won't budge and eurozone countries are unwilling to cough up, how else will Greece plug the gap?

Mr Stournaras has said his country could raise short-term debt or negotiate lower interest rates on its borrowings. But how realistic are these options?

Megan Greene, director of European research at Roubini Global Economics, is pessimistic: "Greece could raise short-term funds selling Treasury bills, but this is high risk, expensive and doesn't solve the problem.

"If the troika aren't prepared to make concessions, I think this Greek government is likely to fall and the country will have to leave the euro in a negotiated exit next year."

Austerity measures

But some analysts believe there is still hope for Greece.

Dr Vassilis Monastiriotis, senior lecturer at the European Institute of the London School of Economics, told the BBC: "If Greece convinces the authorities it is on track with its debt reduction measures, the decision to allow the two-year extension is easy - and by implication - the 15bn-euro funding that goes with it."

Dr Monastiriotis argues that, despite Mr Asmussen's assertion, the ECB will agree to help fund the extension by delaying the repayment of its Greek bonds.

"If the extension is agreed it means the austerity measures can be less drastic and this will stimulate the economy, leading to higher tax revenues, thereby reducing the cost of the extension to the eurozone.

"I remain convinced that Greece will stay in the euro."

An EU summit on 18-19 October is expected to make a decision on the Greek extension request.

Yet again, the future of Greece hangs in the balance, as the Greek people wonder how much more pain they will be asked to endure and for how long.