Greece is facing a financing gap of about 4 billion euros after July next year, according to the European Commission, and an even bigger one by the end of 2016 when the fiscal adjustment is supposed to be completed. Since it is not politically easy or perhaps feasible for some eurozone countries to ask their parliaments to approve fresh bailout funds for Athens, they should do something smarter. They should facilitate Greece’s access to the markets by signaling to the investment community that the country’s public debt has the characteristics of a perpetual bond, that is a bond with no maturity, resembling more equity than debt.
European Commission estimates put Greece’s financing gap at 3.8 billion euros next year, largely resulting from the unwillingness of national central banks to roll over their Greek bonds, according to one official. The gap is expected to show up between August and December 2014. Greece and its international lenders have to decide how the gap will be filled in the fall to satisfy the International Monetary Fund’s demand that the adjustment program is fully funded on a 12-month forward basis, as we understand.
Of course, the estimated gap may turn out to be bigger if Greece fails to meet the revised target for privatization receipts of 2.7 billion euros in 2014 and/or misses its budget deficit goal. On the other hand, it may turn out to be less than 3.8 billion euros if the country does better on privatizations and/or the fiscal front.
Undoubtedly, the sum, whether it is around 4 billion euros or less, is too small to create any problems. One way out would be for the ECB to allow for an equal increase in the upper limit of the Greek treasury bill stock, mainly bought by local banks. The ECB allowed Greece to issue 4 billion euros more in T-bills last August, taking the stock to 19 billion from 15 billion at present, to pay for a maturing bond. The latter was mostly held by the ECB, according to market participants.
Since next year’s financing gap is arising largely from the national central banks’ unwillingness to roll over their Greek bonds, it is normal to expect the ECB to be part of the solution. Of course, a few billion euros may also be available from the 50 billion in funds earmarked for the resolution and recapitalization of Greek banks. But the available amount will not be known before their loan portfolios are stress-tested later this year and perhaps again in 2014. So, the amount from this source, if any, may be available at some point next year. It is also not impossible to think that lenders will demand some new austerity measures so that Greece partly contributes to filling the estimated financing gap next year.
However, Greece will most likely face another funding gap in 2015-16 in addition to the 3.8 billion euros in 2014. The easiest way to fill any reasonable gaps without taking new austerity measures, asking for more politically sensitive bailout funds with conditionality attached from fellow eurozone countries and having the ECB involved is to obtain at least partial access to the financial markets.
The governments of some eurozone countries may be skeptical at this prospect, thinking it gives a greater degree of freedom to Greek politicians, known for their free-wheeling spending habits, and eases the pressure for reforms. Even so, most or all of the reforms will be legislated and at least partially implemented by the time the last EU bailout tranche is paid. Moreover, the introduction of new austerity measures will be counterproductive in both economic and social terms after the barrage of tax hikes and spending cuts surpassing 30 percent of GDP since 2010.
It is therefore in the best interest of the international lenders, the Greek government and the people that the country is self-funded well before the EU loans run out. From the eurozone’s perspective, it will be a success because it will be further proof the political project of the euro is alive and well while German and other taxpayers’ fears of giving more loans to Greece and losing money will ease. From the Greek government’s point of view, it will be a sign of regaining national sovereignty which may be able to sell well in next year’s elections: Elections for the European Parliament and local authorities will be held next May while general elections cannot be ruled out.
For Greece to obtain market access, both the government and the EU can help. The goal of the government should be to enable the country to seize market opportunities and borrow, like last May when the 10-year bond yield fell close to 8 percent. This means some procedures have to be revised so that the general framework for securities issuance and intervention become more flexible and responsive to changing market conditions. Also, the government should also do more technical work to increase the liquidity of Greek bonds and reduce the premium demanded by investors.
On its part, the eurozone should honor its commitment to provide debt relief in the form of lower interest rates and other means as soon as Greece attains the agreed primary budget target. However, it is even more important the eurozone sends a clear signal to the markets that the Greek public debt is sustainable. Although the clear-cut method would be for the official sector to take a sizable haircut so that the debt-to-GDP ratio falls dramatically from more than 160 percent at present, this does not look probable and it is likely impossible for political reasons in the foreseeable future.
So the eurozone should find another way to communicate to investors that Greek debt is a good investment opportunity. Further reducing the interest burden is a necessary condition but not sufficient. Perhaps extending the grace period of the loans to Greece so they look more like a perpetual bond – that is a bond without maturity where the issuer does not have to redeem the principal – may do it. Of course, Greece’s cost of funding will be expensive at first but this is a small price to pay on a few billion euros borrowed for the benefits to accrue in the future.