Under the proposals the Greek government has promised to undertake €50bn asset sales and an additional €6bn revenue generating measures and public spending cuts. The plan, if confirmed by the IMF / EU, aims to reduce public sector debt by around a sixth in addition to lowering the government’s fiscal deficit to 7.5% of GDP this year.
What investors need to appreciate is that, however this is spun, €50bn asset sales, even if buyers could be found for those assets (as warned in yesterday’s note), it would not offset the €78bn in net new borrowing from the IMF / EU last year and this year. What this plan will do, however, is to allow the next quarterly disbursement of funds to the embattled nation on 31st May or shortly thereafter. In turn, this should forestall the country’s immediate cash flow crisis.
The new programme envisages that future disbursements will be contingent upon future fiscal performance relative to the adjusted plan. Note that the next disbursement will be the first under the new plan, so the country’s failure to deliver the previously promised fiscal discipline will not count against it going forward.
Adjustments
The IMF / EU teams will complete their current review in early June. Recommendations will then be sent to the IMF Board. We assume that adjustments to the levels of cash the Greek government will require going forward have been made and that the country will not run out of cash before the next disbursement is made. We note that, according to recent local press reports, Greece had sufficient cash to last through to 18th July.
Investors know that this tactic will prevent an immediate default, but that it does not solve the underlying problem. To reiterate, lending more money to an already over-indebted country only makes the situation worse in the long-term. Greece will almost certainly have to return to the IMF / EU for more yet more funds over the next few quarters.
At the epicentre of the problem lies the fact that Greece owes more money than it can ever possibly hope to repay on outstanding terms. This has not been addressed at all by the new proposals.
Casting our minds back a year, after the initial rescue package was approved in May 2010, investors are likely to take the new proposals at face value and we might expect to see Hellenic bond yields and spreads fall, possibly quite sharply for a while.
That being said, Greece’ cash flow could come under further pressure as 2011 progresses. If that proves the case we’ll be back where we were a day or so ago, with no obvious way to avoid an imminent default. In conclusion, the new plan represents little more than another bending of the rules by global and regional monetary authorities.
Boot down the road
We see this latest development as nothing more than another determined boot of the can down the road. Longer term problems persist. Elsewhere Portugal still has no government and may yet struggle to avoid default itself. Ireland’s attention was diverted by President Obama’s visit yesterday but its intentions in relation to honouring its deeply unpopular commitments remain uncertain.
We continue to argue that the only solution to the periphery’s sovereign debt crisis is a long-term restructuring involving the region’s creditors. This move buys time, but nothing else.
The world is now effectively divided into three basic categories:
1) Those countries that can sidestep fiscal meltdown.
2) Those countries that cannot avoid meltdown but can kick the can down the street. (US?)
3) Those countries that must face grim economic reality now.
