Cash solution from an ESM credit line

Greece’s privatization program is off track and is not likely to get back on next year or perhaps in 2015. This will result in a bigger financing gap that no government can fill by setting more ambitious fiscal targets for political reasons. Since the country wants to avoid taking a new official loan with conditionality strings attached and alternative ways of funding may not be enough, it may be better for Greece to request a precautionary credit line next year – especially if Portugal does the same in the months ahead.

Greece is supposed to raise nearly 11 billion euros from the privatization program in 2011-2016. According to the latest European Commission review, proceeds of 3.2 billion euros were estimated by end-2013. So, the country must raise another 7.5 billion euros by selling assets and other techniques. The bulk of the money would come from the outright sale, long lease and sale and leaseback of public real estate. Although there are thousands of assets earmarked for disposal, demand is very weak – to put it mildly. This is due mainly to the country’s still elevated risk, the unwillingness of authorities to proceed with fire sales given the political cost, and other legal and technical issues pertaining to individual assets.

This has prompted experts to estimate that Greece will collect less from the public property portfolio than expected in the years ahead unless there is a dramatic change in the economic outlook. If one adds the difficulties experienced this year with the Public Gas Corporation (DEPA) sell-off, and the latest complication with the sale of gas transmission system operator DESFA to Azeri Socar, a shortfall in the privatization program of a few billion euros is expected.

The economic policy program is facing a financing gap of 10.9 billion euros through end-2015, without assuming any fiscal slippage, according to IMF estimates. However, pundits think the financing gap will likely end up at 15-16 billion euros by end-2016. Assuming a shortfall of 3-4 billion euros from privatizations, the cumulative gap could be between 18-20 billion euros in this scenario.

The number is small compared to the size of official funding from the EU and the IMF since 2010. Therefore, it is not a big deal for the EU to come up with the additional funding. After all, the Eurogroup made a commitment in 2012 to provide adequate support during the life of the program and beyond, provided Greece fully complies with the program.

However, it is also important from the government’s point of view that the country avoids seeking a new loan with strings attached. Of course, the country could close the gap, even if it ends up between 18-20 billion euros, using various methods. It could seek to attain an even bigger primary surplus than targeted. But negotiations with the troika on meeting the 2014 primary surplus goal of 1.5 percent of GDP show how difficult it is on a political level and how painful on a social one. Imposing more austerity could also risk recovery, keeping the economy in recession for another year or more with unforeseen consequences. It is not an option.

The government could seek to roll-over bonds of 4.5 billion euros expiring next year given to banks to beef up their capital a few years ago. This would close the 2014 financing gap and have a minimal impact on the country’s debt sustainability profile. It is the easiest way out but it will require the approval of the country’s creditors.

The authorities could also seek to issue more treasury bills. However, the adjustment program calls for issuing fewer T-bills than those maturing from 2015 and zero net issuance next year. Once again, Greece would need the approval of the lenders even if it managed to sell the T-bills to local households and others via banks in back-to-back transactions to circumvent the ECB rule on bank holdings.

Greece could also tap into the remaining buffer for bank recapitalization after the conclusion of the stress tests on the loan portfolios by BlackRock and the capital shortfall estimated subsequently by the Bank of Greece. The remaining buffer stands at around 11 billion euros, according to some sources. However, the country may be unable to tap more than 5 billion euros after the above exercise and next year’s ECB stress tests as Athens will likely still have to have a cushion against adverse developments.

Eurogroup-approved debt relief measures such as lower interest rates and the extension of maturities are not seen having a major impact on financing needs over the 2014-2016 period. So, the country may have to raise as much as 13-15 billion euros to cover the financing gap, assuming it ends up between 18-20 billion euros on a disappointment from the privatization program and after the use of the 5 billion recap buffer.

Given the creditors’ unwillingness to extend new funding and the government’s eagerness to avoid a new conditional loan, one option would be for Greece to request a specific precautionary credit line from the ESM. This should cover the 2014-2016 period and amount up to 20 billion euros, depending on the estimated financing needs at the time of the decision. So, Greece may issue medium-to-long term bonds with a safety net at a lower interest rate and avoid undermining its debt sustainability.

It will be easier for Greece to do so if, as expected, Portugal requests a precautionary credit line and gets it first to facilitate its exit from the adjustment program next summer. Meanwhile, Greece will have to show more progress on the fiscal front and structural reforms, and conclude the current review with the troika. This way it will be ready when Portugal offers the template and additional funding needs due to the poor execution of the privatization program do not present such a big obstacle.

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