Monday, November 12, 2012

Eurozone - Two more years

Last night’s Eurogroup meeting paved the way for Greece to stay in the Eurozone. Ministers decided on two additional adjustment years for Greece. Finding the money to fund these extra years, however, was postponed.

Last night’s Eurozone finance minister meeting was finally a meeting that ended before mid-night. European experience, however, also shows that shorter meetings are normally a sign of significant disagreement and that crucial decisions have simply been postponed. Yesterday’s meeting adds evidence to this experience. 

As expected, ministers agreed that Greece could have two more years to meet its fiscal target, shifting the goal of having a primary budget surplus from 2014 to 2016. These two years are a kind of reward for the Greek government. Notably, the official Eurogroup statement is full of praise for the undertaken efforts by the Greek government. Interestingly, the statement also refers to the efforts taken by citizens, a gesture of acknowledgement of the social impact of austerity measures and structural reforms. 

Of course, more time also means more money. Two additional years lead to an immediate funding gap of around 30bn euro which needs to be filled but also put the debt sustainability target of a debt ratio of 120% of GDP by 2020 at risk.

As regards the funding gap, no decision was taken last night. Eurogroup president Juncker announced that this issue should be discussed at another meeting on 20 November and at the latest on 28 November. These dates will give governments the chance to get the green light from national parliaments for changes to the Greek programme. As regards debt sustainability, media reports mentioned a debt ratio of 140% of GDP in 2020 in the new troika report.

The race on how to finance the new 30bn euro and how to restore debt sustainability is still open. Option range from a clean-cut third bailout package for Greece to debt forgiveness. In our view, probably none of these two options will eventually be chosen. The most likely outcome of the next two weeks should be a typical Eurozone fudge: lower interest rates on the current Greek loans and an extension of the loans. Imagination or creativity has no limits. Yesterday, Juncker offered another fudge, saying that the date of bringing the debt ratio down to 120% of GDP could simply be delayed by two years. But let’s be clear, even such a Eurozone fudge would be a covert Official Sector Involvement as rescheduling of debt obviously also has its costs.

Yesterday’s meeting was another small step in the Eurozone saga. The political will to keep Greece in the Eurozone had already emerged over the summer. Now, it looks as if all other elements have to fit into this political will. We remain confidence that the next tranche will be paid and that the Eurozone will also find an agreement on how to bridge the new funding gap in the next two weeks. Needless to say that the final decision on the next Greek tranche, a new financing gap and debt sustainability will not be the end of the matter.

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