Will the Greek Left Sign ‘The New Memorandum’?* by Dr. Andreas Koutras**
Possible Political Consequences of an Envisaged New Greek Loan Agreement
It is painful to watch the mouthpieces of Greece’s clientele-serving political parties thrashing it out on live TV over ‘primary surpluses’, ‘new measures’ and/or the implementation of a new Loan Agreement with the country’s creditors. In fact, it is outright disturbing to witness so much cacophony in respect of what really amounts to 6th-grade arithmetic.
Let us start at the beginning: Greece’s current Loan Agreement (a.k.a. ‘The Memorandum’ to laymen) expires in 2014. Its original intention – or rather, exaggerated wishful thinking – was for Greece to be able to tap the global capital markets to cover any ‘shortfalls’. But just what are these ‘shortfalls’? And could they not be met by the country’s much-touted ‘primary surpluses’?
Greece’s post-crisis fiscal adjustment has been truly spectacular, relative to global precedents and standards. The cutbacks and sacrifices of employees, retirees, and all those who cannot avoid or evade taxes have been – and continue to be – enormous. Yet the end result – even after substantial window-dressing and accounting trickery (such as the transfer of ECB profits to the country’s coffers) – is that Greece will just – only just – post a minuscule budget surplus for 2013. In other words, despite being welcome, Greece’s primary surplus is nowhere near enough to help pay down the accumulated debt.
Greece’s much-publicised ‘access to global capital markets’ is not a viable solution: no-one in his right mind would refinance at 7-9% when other European loans offered by the EU/IMF are at 1-2%. Tapping the markets could be done just for show, but under no circumstances would it constitute a solution; the requisite amounts (over and above any deficit financing) are as follows:
(1) ECB debt: EUR 9 billion of these bonds, which were illegally exchanged for new bonds so as not to suffer the same ‘haircut’ as the privately-held bonds which were subjected to the PSI, expires in 2014. Another EUR 7 billion expires in 2015, and an additional EUR 1.6 billion expires in 2016. Greece will have to repay these bonds in full and with interest.
(2) IMF debt: The Loan Agreement stipulates the repayment of EUR 8.2 billion in 2014, EUR 9.3 billion in 2015, and EUR 4 billion in 2016.
(3) Bank debt: A few years ago, by FinMin decree, Greek banks were allotted a special class of Greek debt to bolster their capital adequacy, while the State received preference shares in those banks (with a juicy 10% yield, which some banks are now refusing to pay) in return. EUR 5.3 billion of this debt expires in 2014. Needless to say, the State’s preference shares are not worth much currently, so the State has lost money overall. Even more grotesquely, the State now owns some 80-90% of those banks’ share capital, via the Financial Stability Fund.
(4) Bank recapitalisations: Those thinking that the recent recapitalisation of Greek banks will suffice to perpetuity are grossly mistaken. According to estimates, Blackrock’s updated report on this matter will reveal a further capital shortfall of some EUR 12-18 billion. This money must be raised somehow, as the existing cushion of ca. EUR 10 billion (left over from the first recapitalisation drive) will most probably not suffice to restore adequate health in Greek banks’ balance sheets.
Make no mistake: the expiring ECB debt will need to be redeemed. It is highly unlikely that the ECB will agree to roll this debt, as this would contravene the Maastricht Treaty, which prohibits any ECB financing of member states. In this case (given the lack of funds), a possible solution would be to roll over the ECB debt using ESM (European Stability Mechanism) funds. The IMF is equally unable to roll over Greece’s debt, unless this is done within the framework of a new programme – which, of course, will require a new Loan Agreement or ‘Memorandum’. Once again, the only other alternative would be to refinance this debt with ESM funds. Finally, in respect of the bonds allotted to Greek banks in exchange for preference shares, it remains to be seen under what terms and conditions the Greek taxpayer will be called upon to foot the bill.
The foregoing considerations compel us to conclude that a new Loan Agreement needs to and will be negotiated and implemented. Now, let us recall that one of the key requirements of the ‘Troika’ in respect of the extant Loan Agreement was for the leader of the chief opposition party at the time (Mr Samaras of New Democracy) to bind himself personally and on behalf of his party to the Agreement, so as to prevent any subsequent repudiation thereof by dint of a change of government: the question naturally arises as to whether the ‘Troika’ will demand the same of the leader of the current chief opposition party (Mr Tsipras of SYRIZA) in respect of the envisaged new ‘Memorandum’. And, if this turns out to be the case, a further question also arises as to the trade-offs and undertakings which the Left and Mr Tsipras are prepared to accede to – because if they don’t accede to or accept anything, the most probable outcome is that Greeks will have to vote for a new national government at the same time as they vote for their representatives in the European Parliament.
Unless, of course, the restructuring of Greek debt via a new ‘Memorandum’ is presented to the Greek electorate as a huge personal success of Mr Tsipras, who can then feel emboldened enough to sway his party more towards the Centre – thereby negating and repudiating many of his electoral promises and a lot of his rhetoric: behold ‘The New Memorandum’, and behold the potential political upheaval._
*This is a translation of the original article, published in Greek on the prominent Greek newspaper Kathimerini on 19 October 2013.
**Dr. Andreas Koutras, Scientific Advisor at SteppenWolf Capital LLC, Zurichstrasse 44, 6006 Luzern, Switzerland