Wednesday, November 21, 2012

Eurozone - Haste makes waste

Eurozone finance ministers have a strong affinity for cliff-hangers. Last night’s almost twelve-hour meeting did not bring any conclusion on how to finance more time for Greece. The decision was postponed until next week Monday.

The only thing that is clear after last night’s Eurozone finance minister meeting is that nothing is clear. The Eurogroup postponed the decision on how to finance more time for the Greek adjustment to next week Monday. The phrase in the official statement that “the Eurogroup has had an extensive discussion and made progress in identifying a consistent package of credible initiatives aimed at making a further substantial contribution to the sustainability of Greek government debt” shows that disagreement remains deep.

For once, Greece had apparently no responsibility for the further delay. Indeed, the final statement praises Greece for having met all prior actions required ahead of the meeting, citing structural reforms, the budget for 2013 and the 2013-2016 medium term fiscal strategy. Data released yesterday by the Greek Ministry of Finance confirmed that progresses in the implementation of the adjustment are indeed being made, with the state sector budget execution ahead of schedule at end of October.

At the Eurogroup level, the two issues at stake still are: i) the financing of the Greek funding gap, resulting from two additional years to adjust, and ii) how to restore long-term debt sustainability. Finding the money for two additional years (up to 32bn euro) is probably the easier task than restoring debt sustainability. According to latest reports, Greek debt will rather be above 140% of GDP in 2020 than close to the official target of 120%. In euro, this gap in 2010 will probably amount to 70bn to 100bn. Finding such an amount requires lots of financial creativity as long as Eurozone countries do not want to embark on clean-cut solutions like debt forgiveness or a third package. The current deadlock seems to result from strongly diverging views between the IMF and the Eurozone on how to restore debt sustainability. While the IMF favours a clear-cut solution, most Eurozone countries seem to support a the fudge option, interpreting debt sustainability in a more flexible manner than the IMF.

Last night’s meeting has again shown that that the Greek case pushes the limits of Eurozone finance ministers’ financial creativity. Or to put it more positively: maybe ministers just follow the principle of haste makes waste.

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