Bridge funds to make ends meet
The Greek economy will have to stabilize in the first six months of 2012 for the fiscal effort to bear fruit and building social tension to start easing. However, this is unlikely to be the case unless expectations about the country?s participation in the eurozone are anchored firmly and the private sector finds its footing.
There is no doubt that the new government under Premier Lucas Papademos has done its best to undo the latest damage inflicted on the country?s standing in the eurozone, following George Papandreou?s idea to seek a referendum on the agreement reached with the leaders of Germany and France on October 26-27.
However, little can be done to reduce the heightened political risk since the country is to hold early general elections at some point in the spring. More so since the polls show the leading conservative New Democracy party has yet to attain popular support levels that are compatible with a commanding majority in parliament.
Heightened political risk does not help but it will not be the determinant factor in shaping people?s and the markets? expectations over the course of the Greek economy, at least for some time, as long as the transition government delivers on a number of tasks it has undertaken.
These are the endorsement of the 2012 budget by the three political parties supporting the transitory government, the approval by Parliament of a bill encompassing a number of measures agreed with troika, the conclusion of negotiations with the troika on the new bailout package and the completion of negotiations with private sector bondholders about the new PSI (Private Sector Involvement).
It is reasonable to assume the 2012 budget and the new bill will be endorsed by Parliament, even if some political bickering takes place. Therefore, the conclusion of the negotiations with the private bondholders about the terms of the new PSI and the troika about the second bailout deal are of utmost importance in shaping expectations.
This also explains to some extent why the government wants to achieve a primary budget surplus, meaning the revenues to exceed expenditures excluding interest payments on public debt. A primary surplus sends a message to the markets that the country has started putting its public finances in order and makes investors more willing to hear its story.
It is reminded that Greece?s main fiscal aim is to achieve a primary budget surplus close to 1 percent of GDP in 2012 compared to an estimated primary deficit of 1.8-2.2 percent of GDP this year and 4.7 percent in 2010. The last time the country attained a primary budget surplus was a decade or so ago.
However, all experts agree that the fiscal effort may be endangered if the economy continues to contract at a fast clip. Some pundits already see a deviation from the 2011 budget deficit seen at 9 percent of GDP in 2011 due to the economy?s weakness.
Since the public sector will continue to shrink in coming years, the only ray of hope for the Greek economy will have to come from the private sector. There are already some encouraging signs from the export product and services industry but these cannot make the difference in a relatively introverted economy.
Improving the infrastructure so that Greece can absorb much more EU structural funds than it has done can also help, but the outcome has been less than satisfactory so far.
So, help for the country?s embattled private sector has to come from elsewhere before the falling dominoes created havoc, undermining the fiscal effort.
At this point, we think it is imperative that Greece addresses market concerns over whether it will remain in the euro or go back to the drachma days. The best way to do so is to secure an agreement with private investors on the terms of the new PSI to cut the public debt by as much as 103 billion euros in the next few weeks, and to conclude negotiations with the troika by end-January.
It is noted that PSI is part of the second bailout package agreed in late October, whereby the country is fully funded with an additional amount of 130 billion euros by the end of 2014.
If the markets know Greece is backstopped by the EU and possibly the IMF by 2015 they will stop doubting, at least so much, whether it will still be a member of the euro club. This will have the beneficial effect of unleashing some funds for private investment, waiting on the sidelines to see what is happening on that front.
But the country will have to rush to capitalize on the successful conclusion of negotiations with the private bondholders and the troika as soon as possible and not wait until March when the first jumbo disbursement of 80 billion euros is projected to take place.
Since 20 billion out of the 80 billion euro or more will go toward financing the budget deficit, treasury bills and other state arrears to the private sector, Greece should seek bridge financing from international banks (the European Bank of Reconstruction and Development comes to mind), for 10 to 20 billion euros earlier than March.
This way the state can repay some 7 to 8 billion euros it owes to the private sector, boost business confidence and help banks? liquidity since almost all of the private firms have received bank loans, pledging the amounts the state owes them.
Moreover, retiring a few billions of euro worth of T-bills will further enhance the liquidity of local banks, making it easier for them to provide credit to the private sector. Greek banks are almost the sole buyers of T-bills in the last few months and cannot fully fund them at the ECB as they used to do in the past.
This bridge financing, which can take place much earlier than mid-to-late March if Greece concludes the negotiations as soon as possible with its creditors, can help sentiment and put a brake on the developing credit crunch, undermining the stabilization of the Greek economy.
All-in-all, Greece should try to speed up negotiations with its creditors, pass the 2012 budget and all relevant bills in Parliament to show the markets that there is a backstop and seek bridge financing earlier to help the private sector take a breather before it suffocates.