Let Greece defuse financing gap issue

Greece’s financing gap, estimated around 11 billion euros over the 2014-16 period, has become an issue of political contention in Germany ahead of the general elections in September. It should not. The Greek government should help by stating clearly that it is not in favor of the third package mentioned last week by Finance Minister Wolfgang Schaeuble, and will therefore seek other ways than loans from the European Stability Mechanism to fund the gap in cooperation with the European Union.  

By all accounts, the estimated funding gap of 11 billion euros over the next few years is very small compared to the amount of loans, totaling 240 billion euros, extended to Greece by the EU and the International Monetary Fund. Even if the size of the gap is revised upward to 15 billion, it is still small compared to the total. Nevertheless, it has the potential of causing a lot of problems, such as friction between the political forces in some EU countries and between the EU and the IMF. It is therefore in everybody’s interest to deal with the financing gap in a way that minimizes strains.

Since the IMF wants the adjustment program to be fully funded on a 12-month basis in order to continue to lend to Greece, and projects a funding hole of more than 4 billion in the second half of 2014, the issue will likely come up in the autumn, at least as far as this amount is concerned. But the funding gap is also related to the sustainability analysis of Greece’s public debt in the sense that debt relief measures, such as interest rate reductions and the lengthening of maturities, help narrow the gap.

Last November the Eurogroup committed to take more measures to drive the Greek debt-to-GDP ratio down to 124 percent by 2020, provided the country produced a primary surplus and continued to implement reforms. At this point, it looks likely that Greece will post a primary surplus in 2013. Although there are still risks, emanating mainly from the social security funds and the public healthcare area, the chances are revenues will exceed government spending – excluding interest payments – for the first time since 2002.

The final fiscal data for 2013 will be available in March but a fairly safe preliminary conclusion on the primary budget outcome could be reached by early December, provided the current fiscal outperformance vis-a-vis the program targets is continuing then. So, decisions on more debt relief measures, mentioned by Chancellor Angela Merkel and others, could be taken before next April. These measures will partially satisfy the IMF, close the estimated funding gap by a few billion euros and help the two-party coalition government’s image ahead of the likely triple elections – national parliament, European Parliament and local government – next June. The coalition government would like to see the Eurogroup approve the attainment of the primary surplus sooner rather than later because it will be able to use 70 percent of the amount above the targeted primary outcome to boost the economy and enhance the standing of the two ruling parties at the polls.   

So, the sooner experts agree that Greece has achieved a primary surplus, the better for all parties involved. Still, shaving 2 or 3 billion euros off the estimated amount of 11 billion required to fill the financing gap until end-2016 is not enough. This is more so if the gap is revised up to 15 billion euros on fewer than projected privatization revenues, fiscal slippage and perhaps other unfunded liabilities. It is clear the country could raise an additional amount of up to 4 billion from selling treasury bills. This could be done through local banks with the approval of the European Central Bank and/or by direct sales to the Greek public.

The concerted effort by the four systemic banks to cut the interest rates on time deposits will translate into lower interest on T-bills, which are regarded as competitive instruments. Of course, the banks would not be happy if the sale of the T-bills were financed exclusively by deposits but the amount, even if it is 4 billion euros, is not intolerable. Moreover, T-bills, unlike bonds, were not subjected to a haircut in last year’ PSI sovereign debt restructuring and will not frighten people hungry for yield.

Having secured 6-7 billion euros via T-bill sales and debt relief measures, the country could find the rest – some 5-9 billion – by two other means. First, the prepayment of a few billion from the EU structural funds earmarked for Greece for the 2014-20 period. This obviously requires the consent of the lenders, namely Germany, and the European Commission. Second, tapping the international markets. Paying high interest rates to hedge funds and others to borrow a few billion euros for five years or more over the 2014-16 period will not make a difference in Greece’s average cost of borrowing and debt sustainability analysis. As a matter of fact, we think the country can borrow the whole amount of 11 billion or more from the markets and close the funding gap this way.   

Greece could also give incentives to the public hiding some 20 billion euros in their homes and elsewhere, according to Finance Minister Yannis Stournaras, to use part of it to fund the gap. On the other hand, it may not be a smart idea to use part of the remaining 8.5 billion euros for banks’ recapitalization to fund the gap as some have suggested. This is so even if the resulting capital shortfall from the new stress tests on loan portfolios could be covered by banks through asset sales and other means.      

All in all, the government should state publicly and clearly that Greece does not need new loans from its lenders in the form of a third package to fill the estimated funding gap of 11 billion euros or more over the 2014-16 period. Still, it will have to consult the ECB, the EU and others to prepare a plan for funding the gap, giving some weight to internal financing. This way, Greece will hopefully stop being a topic in the German election campaign and elsewhere and deal with the problem proactively.