Timing a Greek default;

There are three main mechanisms that could precipitate a default;

1. EZ and IMF pull future lending
2. Greek banks face a domestic run on deposits
3. Greece finally starts running a primary budget surplus and political cover allows them repudiate "odious debts".

(1) seems unlikely. Not because I believe that these institutions are committed or well organized, but because it would require action, as we have seen they clearly need a lot of prodding to do anything.

(2) would be very hard to predict as it is based on group confidence, so in modelling or thought process terms, its just a poisson process. 

(3) on the other hand *should* be easy to forecast. (well if one could have any confidence that Greek reported figures were accurate or not deliberately manipulated).

There have been several rumours that Greece has been inflating their budget deficit figures.

Their most recent projections however show that they should be running a primary budget surplus next year. In which case it makes even more sense that they promise reform programmes that kick in with savings in 2015 to secure immediate loans.

I am cynical so it is easy to speculate that Greece is deliberately trying to maximize the receipt of a fiscal transfer. What I find much more difficult to understand is the German position.

Many commentators have tried to explain their actions as 'pot committed politicians'. That it is just politicians trying to save their pride and hide the folly of their euro project designs. In reality the polls and general German media commentary actually suggests that not to be the case, that the population actually support some form of action, perhaps because they don't understand the true cost?

It appears to me that Merkel is deliberately obfuscating and is reluctant to face the consequences on ANY decision, be they supporting the euro, drawing a line in the sand, or turning their back. That is very weak.

Roland Berger published a plan which they called "Eureca". Which essentially said that Greece should take €125bn of assets (clearly overvalued for the purpose) and put them into a SPV in Luxembourg, and sell them to the EZ, use the proceeds to do a massive bond buy back. Then the SPV could be unwound, if the proceeds were lower than 125bn Greece would be liable to top it up, but would retain any upside if the assets were more.

There were some worrying features;

1. Putting the assets in an SPV in Luxembourg really is meaningless, if Greece decided to nationalize the assets again International law would be pretty much useless, or they could apply huge tax rates to those assets and perform a defacto nationalization.
2. Clearly this is just a secured loan, because Greece would still be liable for any shortfall, in which case unsecured creditors would still be wary on an ongoing basis of making new loans to Greece.
3. For the assets to have real value rather than to be trophy assets, then they must have some associated cashflow, in which case the secured loan must actually have a cost, ie. If they include public offices, then clearly the SPV must be paid rent, in which case the improvement in fiscal position is a lot smaller than the headline figure.
4. The point which was repeated several times that was most worrying however was the boast that such a plan would "burn speculators". Which they believed would cause spreads on the rest of the peripherals to collapse.

This last point just shows that they don't have a clue.

Jeffrey Sachs makes the Eurocrat case;

http://blogs.ft.com/the-a-list/2011/06/30/greece-can-be-saved-heres-how-to-do-it/

to paraphrase, Greece doesn't have to default if it has 3% interest rate, and breathing space and can magically get its economy growing again and cut its 18% deficit into a surplus....

if you punch all of those assumptions and hope into a model you'll see that the debt load is sustainable.

(red lines are historical data from Eurostat, that we've aggregated, blue lines are the forecasts with all of the assumptions above)..

It is a *little* rich for Mr Sachs to call those expecting a default naive, especially when the scenario that avoids default has so many conditions and unrealistic political movements.

I'll say it again, Greece will not default while they are still getting more loans, they'll borrow more money, but when the time comes for budget surpluses to be run, then they'll default and use the cover of the rioters and language of 'odious debt'.

why the eurocrats think that re-profiling Greek debt will work.

I started off yesterday, with another post about Greece, it was boring....

digging through the numbers it just becomes so clear that Greece fudged its way into the euro. Greece ran a primary budget surplus of 3.62% before joining the euro, and then really just let it all hang out and since has been running -2.47%, whereas over the same period Germany ran 0.27% and 0.34% respectively.

Greeks' not paying high real net tax rates is not a new thing, preEuro (pE) tax revenues as a % of GDP, 39.64% versus aE 39.21%. So it really is the spending side of the equation that has made all the difference; going from 36% to 42%. ie having a Northern European welfare state, but also low taxation, and plenty of EU funds.

It has been incredibly puzzling that European ministers believe that reprofiling will sort out what I believed, like other commentators, to be a solvency crisis.

After the 90% net debt to GDP, its a when not if case of default, and lets call it default not modification, restructuring, etc.

Banks might be willing to pretend that a reprofiling (ie saying you can have your money back in 20yrs rather than 10yrs) is not a default, but a zero coupon german government bond would go from 71 to 51, a 30% haircut. Banks that have this crap in their "banking book" should still be able to pretend that there isn't a loss.

anyway

can Greece reach a stable equilibrium without default?

In eurocrat world, the answer has been muddled.

Under what parameters does Greece avoid blowing up?

Its current interest payments/total debt outstanding gives us the average interest rate which stands at 3.83%. Germany at 2.87%, so the credit spread that Greece "feels" is only 130bps. Even at that low level it was forced to ask for aid.

Believe it or not, it managed to feel a credit spread of only 56bps on average since joining the euro, instead of the 329bps before.

IF Greece were to reprofile, in terms of modelling that is just a guaranteed rollover of a bond into a longer maturity with the same coupon. BUT given that Greece is having to borrow to meet its coupon payments at the moment then it will still see some uplift in its effective average interest rate, unless it is given even greater access to EU funds.

So lets assume we lose our minds, and give the Greek government a pass, and assume they can bring their primary budget balance to a pre euro surplus of 3.4%, and that they have strong nominal GDP, what is the interest rate that avoides them spiraling out of control and needing to default. Well it looks like at about 600bps credit spread is the cut off point, above that and Greece is bust, below that it *could* turn its self around, if the Government managed to turn a 4% primary budget deficit into a 3.5% surplus over a few years, with very high economic growth. THIS IS WITH REPROFILING...

without reprofiling....then that stable credit spread is only 450bps.

assuming the market lost its mind and allowed Greece to roll its credit at current spreads, in less than 5yrs half of Greece's increased tax revenue would be spent paying the interest alone.