Funding picture is better than thought

The Greek government’s plan to tap the markets for 9 billion euros to cover next year’s funding needs is clearly undermined by political risk and the prospect of premature elections. However, the country may be in a much better position to fully fund the 2015 gap and replace the IMF loans than thought, assuming the EU agrees that 11.4 billion euros that have gone unused from the bank recap scheme could take the form of a precautionary credit line.

The Athens Stock Exchange general index recouped last week some of the sharp losses suffered the week before, aided by estimates and rumors that the ECB’s AQR (Asset Quality Review) and stress tests would show a small, manageable capital shortfall for the four core Greek banks at the end of 2013. Bonds also rallied, with the 10-year yield tumbling to a still very high 7.39 percent on Friday from about 9 percent a week earlier. The 5-year bond saw its yield fall to 6.23 percent from about 7.6 percent a week before.

Following the ECB stress tests and assuming all four core banks will not resort to the reservoir of about 11.4 billion euros, originally destined for bank recapitalization, the amount will be made available for debt reduction. The government appears to be working behind the scenes to convince its European partners and lenders for that sum to become a sort of precautionary credit line in the post-program period.

There is no doubt it will be very difficult or impossible for Greece to borrow sizeable amounts on the markets at the prevailing high interest rates because they are not justified on debt sustainability grounds. Even if bond yields come down further, it will be very difficult to justify interest rates in the area of 6 percent for 5- and 7-year bonds. The draft budget for next year assumes Greece will borrow 9 billion euros from the markets next year. Yields may indeed come down sharply if the political risk subsides in the months ahead and expected debt relief talks bear fruits. But it is not prudent to plan ahead without accounting for the possibility of an extended period of political uncertainty.

This means that Greece must have at its disposal the total amount needed to fill the 2015 funding gap and replace the IMF loans, assuming no market access except for the refinancing of T-bills, to exit the program. In this regard, a precautionary credit line of 10-11.4 billion euros does not suffice since it is not credible enough alone to mitigate market fears. According to a high-level central bank official, the IMF estimate for a funding gap to the tune of 12.5 billion euros for 2015, back in June, has to be revised. So, what is the total amount we are talking about?

In a recent report, Morgan Stanley put Greece’s funding gap at 8.8 billion euros next year. The US bank assumes gross funding needs of 20.1 billion euros, including a budget deficit of 2 billion euros, arrears of 2.5 billion and the repayment of IMF loans equal to 8.6 billion and bonds of 6.7 billion euros held by the ECB. On the other side, total funding sources are estimated at 11.3 billion euros. This estimate incorporates privatization proceeds of 2.2 billion euros, the return of income equal to 2 billion euros from Greek bonds held by the ECB and the national central banks of the Eurosystem and new IMF loans amounting to 7.1 billion euros.

But the government has made it clear it would like the IMF to exit the Greek program at the end of this year. In this case, Greece will have to give up the remaining IMF loans, meaning the total funding gap will widen to about 16 billion euros based on the Morgan Stanley calculations. It is noted that all estimates assume the country will be able to refinance the current T-bill stock of about 15 billion euros held by Greek banks to a large extent. This is reasonable as long as the ECB stands behind the local banking system.

Moreover, there will be no additional funding needs originating in 2014. It is noted that the country will get around 7.5 billion euros from the EFSF, the ECB and the IMF upon completion of the current review. By our calculations, it should be okay even if it foregoes the IMF part of the loan, put at 3.4 billion euros, because it has borrowed more from the markets this year but its funding situation will definitely be tighter and more vulnerable to internal or external shocks.

Greece will need to have a precautionary credit line of at least 16 billion euros to cover the estimated 2015 funding gap and forego the IMF loans in the worst-case instance that it is unable to access capital markets at all. Obviously, the funds left over from bank recapitalization cannot do it. However, Greece can count on about 9 billion euros sitting in the bank accounts of entities belonging to the general government, according to the high-level central bank official. This amount is much larger than the 3 or 6 billion euros thought to belong to these entities.

If so, Greece could count on about 20 billion euros to finance next year’s funding gap without the IMF loans. The available amount could be further enhanced if two local banks repay all or part of some 2 billion euros owed to the state for their preference shares. This means the country may be in a better situation than thought to fill the 2015 funding gap and forego the IMF loans if the EU agrees to the kind of precautionary credit line sought by the coalition government.

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