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QE for Greece

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WP_20150824_055Greece Macro Monitor (25 October 2016)

QE for Greece: a necessary precondition for stabilizing investor sentiment and preventing the need for further official sector financing post-2018

Taking into consideration the most recent comments by a number of key EU officials on Greece’s possible inclusion in the ECB’s quantitative easing (QE) program this note updates our recent analysis on the issue, focusing on the key preconditions for and the potential timeline of such a development. Furthermore, it revisits the issue of sustainability of Greece’s fiscal position, analyzing the potential medium- and long-term drivers of Greek public debt and explaining why new substantial debt relief from the official sector is a crucial prerequisite for stabilizing investor sentiment and allowing the domestic economy the necessary breathing space to grow its way out of the present recessionary environment.

At this point it appears that PSPP purchases of Greek debt following the successful completion of the 2nd program review would be the only way to engineer a quick de-escalation of government bond spreads and potentially allow the Hellenic Republic to restore market access before the expiration of the present bailout program (August 2018). As we explained in our earlier analysis on the issue, inclusion in the QE program is not a panacea for solving Greece’s lingering structural economic problems. Yet, it appears to be a necessary precondition for stabilizing the domestic economy and averting the need for further official-sector financing following the expiration of the current bailout. Assuming that there is limited appetite by euro area governments for such a development, it may be concluded that a return of the country to wholesale funding markets before the present program expires is in the best interest of all key stakeholders.

Yet, political-economy considerations may prevent a front-loading of the debt relief measures for Greece that were agreed at the Eurogroup meetings of May 9 and 24, 2016. In any case, a quite possible scenario in our view is the specification (and the gradual implementation) of measures in the context of the agreed short-term debt relief framework upon the successful completion of the 2nd program review. This would send a strong signal to financial markets that EU partners remain committed to restore Greek debt sustainability in a gradual (and conditional) fashion. It would also allow the ECB to complete its independent DSA and decide whether to include Greece in the QE program.

The rest of this document is structured as follows: Part 1, discusses in greater detail some of the aforementioned issues and provides a preliminary analysis on the measures that are likely to be implemented in the context of the short-term debt relief framework for Greece; Part 2, provides an outline of the agreed medium- and long-term debt relief frameworks; Part 3 analyses the evolution of Greek public debt and the general government gross borrowing requirement under a range of scenarios for the short-, medium- and long-term relief measures; and Part 4 discusses where the key stakeholders stand with respect to the current program and the need for new debt relief for Greece.

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Greece Macro Monitor_QE for Greece_ October 25, 2016

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