Friday, 23 November 2012

The trials of Troika

Sherlock Holmes famously said that “When you eliminate the impossible whatever remains, however improbable must be the truth”. The latest 15 page confidential report produced by Troika on the sustainability of the Greek debt however follows another philosophy, “When you eliminate the logical whatever remains however irrational must be implemented”.
The document focuses on the dry and misleading debt/GDP ratio rather than on the serviceability of the debt and helping Greece to go back on a growth path. If the current price of the post-PSI Greek debt is correct then the total Net Present Value of the Greek debt is ¼ of 350billion or 42% of GDP. Lower than the 60% set by the Maastricht treaty. Focusing on the debt/GDP in 2022 is missing the forest. Troika is spending a disproportionate amount of time trying to make their excel pivot table work with Harry Potter spells.  In any case let’s briefly look at the main points of this document:
The money would be given after the 3rd of December and possibly in installments.
Troika set two prerequisites for considering the disbursement of the money

  • Segregated account with the Bank of Greece. The account that was created by law in March 2012 would be used to receive the EFSF or any other disbursements and pay the creditors of Greece. Moreover, all the proceeds from the so-called privatizations would go directly to this account to pay off Greece’s creditors. Any payments from this account are subject to prior reporting to the EFSF. Talking about sovereignty loss…..This condition apparently has been fulfilled by Greece. 
  • The other prerequisite or prior action was the passing of laws and ministerial decrees that complies Greece with most of the MOU demands. This too has to a great extend been fulfilled by Greece.

So, if both prior actions are satisfied, why on earth the money is still in Brussels and not in Athens? Apparently, the IMF discovered that the Greek debt is not sustainable. In their famous DSA (debt sustainability analysis) they have found a big hole that needs plugging. The document points out that their hitherto forecasts are pure excel spreadsheet fantasy. One of the excuses given is that their forecast for the recession in Greece was wrong. In other words, they fumbled one more time. After all they are running the Greek government, they should have known better. The other two excuses relate to the delays of the implementation of the program (no doubt significant). One should point out here, that the famous PSI that was touted as the necessary condition for Greece to survive was wholly inadequate. In fact it was never done with a view to make the debt sustainable. But that is a story that would be told later.
So how big is the hole? Troika estimates 14bl in 2014 rising to 32bil by 2016. There are many logical solutions that can be applied to solve this apparent spreadsheet discrepancy. However, the obvious ones have been ruled out. Here is the list and the reasons:
·         No OSI debt haircut. Reason both political but also legal. Politically it would be suicide for any politician who in order to get the consent to bailout Greece from his country’s parliament and people he promised that he would get the money back. This can be done by a future politician not by the  present one. Legally also any losses would bounce on article 125 that states “A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State..”
·         No new money to be given. The reason is political. Apparently no-one wants to go back to his parliament and ask yet again for more money for Greece.
·         The ECB has signaled its refusal to increase the T-bill limit. The reason given is ludicrous. Apparently the ECB “cannot commit to ensure that the Greek Banking system in the future would be able and willing to roll over a higher level of T-bills than foreseen so far”. The ECB further objects to this practice as it can be seen as “monetary financing”. Obviously the ECB has never heard of the 3 year repo to maturity it conducts at the level of almost a trillion euro. So the real reason lies elsewhere, in the realm of politics. The ECB fiercely opposes politicians sweeping their problems under the ECB carpet. 
So if the logical is not allowed what are the options left and why are they irrational.
·         Buy back the Greek post PSI debt. Currently this debt is trading at around 25% of its nominal value. Problem is that current liquidity is around 100million a day and buying significant amounts would rocket the price. A further complication is that in order to do so fresh money would be needed which bounces on the no-new-money principle. Another complication is that for the buy-back to successfully reduce the debt/GDP you need big chunk of it to be handed in voluntarily. If this cannot be done then you can buy enough in order to activate the famous collective action clauses (CAC) and force the rest to comply. Here however, lies another problem. The post PSI bonds are under English law and a recent ruling in the case of the Anglo-Irish found “unfair the oppression of the minority by the majority” in the case of “exit consents”. In other words, you cannot activate the CAC with a view to screw the minority. It was done once to the Greek bonds because they were under Greek law, but doing it under English law would prove more difficult. Needless to say that no-one ever will buy Greek debt again if this is implemented.    
·         Buy back the hold outs of the PSI. Again this needs money upfront and apart from the fact that it is pushing prices up, it also rewards the hold outs to the PSI. This should be a lesson to everyone. Hold out and you will be paid eventually. Also the gain would be minimal as the hold outs are less than 4billion.
·         Greece could of course default on the hold-outs or even on the post-PSI bonds but this will not reduce the debt/GDP ratio as the Eurostat rules would keep the debt till it is settled.
·         “Convincing”  the Greek banks to exchange their post-PSI holdings with EFSF bonds would probably be easy. However you then need to recapitalize the banks again.
·         Finally, they also add the option of having higher primary surplus of around 5%. This level of surpluses can with high degree of confidence be classified as improbable for a sustainable period of time. It is like arm chair generals winning battles with phantom reinforces.
Thus the only options left that have a chance of succeeding are
1.       Re-profiling the Greek debt. Pushing the maturities out by another 10 years is feasible and would give enough breathing space. Deferring the EFSF interest is also an option that is included.
2.       Lowering the interest rate charged. Here the document discusses reducing the interest rate charged. However, reducing it by too much may impose losses on some countries, since they would be borrowing at a higher rate. Apparently the thought of capitalizing the interest rate and giving Greece a 5y grace period on interest rate payments has not crossed their minds because it will not decrease their naïve debt/GDP calculation.
3.       The logical option of not reducing the T-bill limit to 6billion from the current 15billion is taken into account but Greece needs to increase this. There is going to be an extra cost which would slightly increase the debt but it can roll 20billion and alleviate much of the pain allowing the economy to bounce back.
4.       Finally, the document reiterates that strong conditionality must be imposed. Also the magic words “incentive” and “moral hazard” are mentioned.  Namely, we cannot forgive any debt unless we are sure it is not going to be repeated either by Greece or any other country. 
The current spat between the IMF and the EU is irrelevant from the point of view of Greece. It has nothing to do with the sustainability and serviceability of the Greek debt. It is an intra-Troika political battle. The ECB wants to push the politicians to assume their European responsibility, the IMF wants a graceful exit from the mess it was dragged in, and many EU politicians want to kick the can down the road or till after their elections.