Tuesday 21 February 2012

Nanny Mcphee runs Greece

Finally the baby is born and the parents need a good nanny as they are too busy squabbling and fighting with each other. Fortunately, the local Commission had Nanny Mcphee free. As in the movie her purpose is to teach some (fiscal) discipline, show who is the boss and set the rules in the household.
Eurogroup agreed on the 2nd Greek bailout/restructuring of Greek debt. The main points are:

  1. Haircut on the nominal has increased from 50% to 53.5%
  2. Significantly there is NO mention on a “voluntary” PSI. The word has disappeared from the text of this Eurogroup pointing to shifting intentions.
  3. Eurogroup accepts that the ECB and the NCB purchases are held for public policy purposes. The gains may be given to back to Greece. The statement does not say whether the SMP gains would be passed in the form of a loan or gratis. The NCB gains would however be passed back.
  4. There would be closer on-site monitoring by the commission on Greece. In other words, Greece would have Nanny Mcphee for the next few years “…ensuring the timely and full implementation of the programme.” 
  5.  A segregated account where Greece is going to pay the next quarter’s debt would be created. 
  6.  A constitutional change giving priority of payments to Greek debt. Reactions to this would be interesting to watch. I guess that it would not be taken lightly by many political parties back in Greece. 
  7. Eurogroup is aware that more sacrifices would be needed by the Greek people. 
  8. The interest rate would be lowered to 150bp on the Greek Loan Facility 
  9. The IMF is expected to make a significant contribution till 2014 
The aim of the exercise is to reduce the Greek debt to 120.5% by 2020 with the Commission running the Greek state (“…strengthening of Greece’s institutional capacity.”) for the next few years. I remain sceptical if this can really be done efficiently and also if the program can succeed. However, if the Greeks show an appropriate level of compliance then Europe promises not to abandon Greece.Eurogroup also accepted the wrong logic that the ECB is a preferred bondholder. The bond market may start repricing this risk. This development as we have pointed out before is important and it would give rise to many problems and possibly litigations in the future.

This new bailout although it apparently increases the financial help and sustainability of Greece it also increases the political risk of non-compliance and resentment. The greatest fear is that many would see the running of the country as national humiliation and a rallying point for anti-European forces. In the movie the unruly children start respecting the Nanny and finally accept her as a friend. This is however, a fictional happy ending that has low chances of success in Greece.