Greece Says It Has Reached a Deal with Creditors; New Research Says Germany Comes Out Ahead from Lending to Greece Even with 100% Default

Breaking news, from the Financial Times, is that Greece and its creditors have reached agreement on key terms for a so-called “third bailout”:

Greece has struck an outline deal with creditors on terms of a new Euro86bn rescue package, Greek officials said on Tuesday.

“We have a deal,” economy minister George Stathakis told the FT.

Another official confirmed the main points of a sweeping three-year fiscal and structural reform programme had been agreed with bailout monitors from the European commision, the International Monetary Fund, the European Central Bank and the European stability mechanism, the EU’s own bailout fund, Kerin Hope and Christian Oliver write.

Most of the so-called “prior actions” – reforms that the Greek government must implement immediately before creditors will begin to release funds from the new package – had been agreed but that final details still need to be worked out on “one or two items”, an official said.

Among the prior actions expected to be legislated this week are a new Euro50bn privatisation programme, measures to tackle non-performing loans and the full liberalisation of energy markets, he added.

So it appears that barring the tail event of a revolt in the Greek parliament, Greece and its lenders are on track to reaching an overall agreement before an August 20 ECB payment date. Notice that this outcome is consistent with our call on the IMF, that the media noise about the IMF stymieing a deal was a considerable misreading of the state of play. While the staff made clear that it thought a debt haircut was necessary, it gave enough wriggle room to allow for aggressive debt reduction (meaning via extensions of maturities, further reductions of interest rates, and payment deferrals). Merkel agreed to debt reduction weeks ago, meaning all there was was for the IMF and the creditors to hash out how the numbers needed to work for the IMF’s models.

As the two sides seem moving in on cinching an agreement, the BBC has reported on a German study that argues that Germany came out ahead of lending to Greece even after you allow for large debt writeoffs. Key points:

The Greek debt crisis has saved the German government some €100bn (£70bn; $109bn) in lower borrowing costs because investors have sought safety in German bonds, a study has found.

Even if Greece defaults on all its debt, Germany would still benefit, says the German IWH institute….

However, the study by Halle Institute for Economic Research said Germany had made interest savings of more than 3% of GDP between 2010 and 2015, and much of that was down to the Greek debt crisis.

Greece sought its first EU-IMF bailout in 2010 and Germany provided funding over the past five years either directly or through the IMF or the European Stability Mechanism.

The IWH study says every time this year there was a spike in the Greek debt crisis, which made Greece’s exit from the euro appear more likely, German government bond yields fell. Whenever the news looked better, Germany’s bond yields increased.

Even if the situation were to calm down suddenly, Germany would still be expected to profit from the situation, the IWH argues, because medium- and long-term bonds issued in recent years are still far away from maturing.

An analysis from Der Spiegel, which looked at worse-case scenarios of a default and Grexit, came up with losses well under €100 billion. And notice that Der Spiegel did not attempt to do a net present value calculation, which would lead to considerably lower figures in real terms. From its June 30 story (emphasis original):

Total Risk for Germany — If Greece Remains in Euro

Even though the total figure of €61.53 billion is quite large, its actual impact on the German budget would be less dramatic because the losses would be spread out over a long period of time extending to 2054. The annual losses occurred would never exceed €3 billion, with most yearly figures running between €1 billion and €2 billion. Those sums certainly aren’t peanuts, but a country as big as Germany should be able to absorb them. Just to offer a comparison, the city-state of Berlin received €3.5 billion in transfer payments from other German states last year. One also shouldn’t forget the effect of inflation: The just under €3 billion in debt default Germany would have to cover in 2043, the year with the highest risk for the country, would likely be a considerably lighter blow then than it would be now.

Total Risk for Germany in the Event of a Grexit

If Greece were to exit the euro zone altogether, additional liabilities would ensue through the Greek central bank’s departure from the European Central Bank.

The majority of these liabilities relate to emergency aid provided to Greek banks, the so-called Emergency Liquidity Assistance (ELA). This sum currently totals around €90 million. As the ECB’s biggest shareholder, Germany would be responsible for about €23 billion of that sum. In the event of a Grexit, this would bring Germany’s total exposure up to about €84.5 billion.

Still, it is highly unlikely that these ELA loans would have to be written off in their entirety. They are collateralized — even if the securities they are backed by are Greek government bonds and corporate credits. Besides, as previously stated, it is uncertain whether ECB losses would have to be immediately compensated for at their full value.

Update 5:00 AM: A Reuters story gives the primary surplus targets. It still has Greece required to achieve a draconian 3.5% fiscal surplus target by 2018, although with a superficially easier levels in intervening years than in the June targets that both sides had agreed to. But given how much the Greek economy has deteriorated since then, the interim targets probably amount to the same, and potentially more, net tightening:

The targets, tweaked from an earlier baseline scenario, foresee a 0.25 percent of gross domestic product primary budget deficit in 2015, turning into a 0.5 percent surplus from 2016, 1.75 percent in 2017 and 3.5 percent surplus in 2018, the official said.


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  1. No one in partiular

    The results are surly a little bit one sided, aren’t they? While the German government paid less interest (as everybody else, by the way) – the German savers are definitely very much worse off. The low euro rate (engineered to boost export in the periph) may help the turn over of German exporters at a first glance, however, as they import a lot of the pre products – and pay more for it, the margin staying in Germany is much lower; even before you take into account that most of the big German exporters foreign- owned. There is more to it than this one-sided study, and the outcome most possibly not as positive as the study implies. Especially if you would consider – all these “computations” assume Germany would only pay 27% – which is only true in case all of its partners, i.e. France, Italy, Spain and the lot are as solvent as Germany is, i.e. the joint-and several pledges do not come into play in a “worst-case” scenario.

  2. TheCatSaid

    The primary surplus targets (3.5% in 2018) look harsh imprudent unrealistic insane.

    In practice, can primary surplus targets sometimes be renegotiated during the course of the 3-year bailout?

  3. IsabelPS

    My oh my oh my.
    I didn’t understant what were “taxes in favour of third parties” (which are to be scrapped as per the agreement) so I googled it up:

    – Two fifths of the income of the relief insurance fund for civil servants are received from the telecommunications company of OTE and are used for paying the pensions of the Special Relief Fund for officials suffering from tuberculosis.

    – 0.85 percent of the monetary penalties and imprisonment penalties turns into cash and is used by the relief insurance fund for the lawyers of Athens.

    – In the case of new information or any changes regarding the statute of a company, the company pays the following amounts to the relief insurance fund for the lawyers of Athens: 1.1 percent of the capital of sole proprietorships and limited liability companies for submitting company statutes to the District Court and 2.5 percent of the companies’ capital for any publication of the representation agreement acts and their terms.

    – 2 percent of the selling price of cement that goes to the auxiliary fund of the personnel working in cement companies.

    – 2 percent of the rental income of municipal buildings and construction sites provided to the relief fund for municipal employees.

    – the income from issuing permits and certificates for church marriage, and 4 percent of the invoices for expenses regarding the sale of candles in favour of the insurance fund for priests.

    – 0.5 percent of the annual revenue of all insurance funds benefits the relief fund of the National Social Security Fund.

    – 10 percent of the outstanding winning tickets at the races and 0.5 of the gross revenue from bets that are paid to the relief fund of the racecourses’ facility staff.

    – 1 percent of each user account and 1 percent of each delivery of the National Company for Water Supply that go to the relief fund of the employees in the company.

    – 0.01 percent on the quantity of cement, alcohol and flour produced that are deducted in favour of the relief fund for chemists.

    – 2 percent of the annual income for medical research on learner drivers which is paid to the relief fund for civil servants.

    – 0.5 percent of the value of military construction that goes in favour of the Officers’ Independent Construction Organisation.

    – 1.5 to 3 percent of government spending on office supplies, rent, deliveries and projects in progress that goes in favour of the pension fund for civil servants.

    – 0.29 to 0.44 euro for each bed in private clinics, which is deducted in favour of the relief fund for doctors.

    – 0.40 euro for each 25 kg of flour and 2.9 percent of the amount paid to the Federation of Bakers.

    – 0.1 percent of the annual turnover of oil companies provided to the relief fund for their employees.

    – 1 to 5 percent of the value of different insurance policies paid to the fund for professional insurance of employees in insurance companies.

    From an article of last year:

    1. TheCatSaid

      Amazing stuff. It’s great to see some of the details spelled out, to give an idea of the kind of carry-on.

      Who decides how each of these third-party funds are divvied up?

      1. IsabelPS

        I presume (I presume!) it is something that evolves over time. Nobody sits in an office and makes a plan. I suppose that is part of the way political parties have been buying votes, something that is often referred to in Greece. I must say that, up till now, I didn’t quite understand how that worked (buying votes at local level seemed straight forward, but at national level??).
        I wonder what will be more difficult to dismantle, the Triangle of Corruption or this insidious capture of the State.

  4. David

    the city-state of Berlin received €3.5 billion in transfer payments from other German states last year.

    Transfer payments to Berlin, but austerity for Greece? Where is the neo-lib outrage?

    1. washunate

      That sounds like exactly the question. Does Greece want to become like Bavaria, a somewhat independent entity who sides with the Federal Republic when called upon? Or does it want actual independence, to be a sovereign nation?

      Or a sightly different context, the difference between the Hellenic Republic and the ‘ole Democratic Republic is that the latter ceased to exist. That’s why the German neo-libs don’t complain about the new Berlin Hauptbonhauf train station and the archaeological digs at former Berlin wall sites and the million other things they are doing exploring and rebuilding the former East Germany. They are all for fast trains and maintained highways and universal paid time off and strong environmental regulations and universal healthcare and solar panels and wind turbines. They just want to make sure you don’t later complain about your sovereignty being trampled. That kind of conversation is, I think they would say, inefficient.

      After all, it’s what us Anglo-Americans did to Germany. We remade their very government in our image. And then we started the Cold War. And then we gave them the Marshall Plan. And we kept our military bases, of course. Don’t want to give those up lightly.

      1. David

        Thanks for the link. Interesting that fiscal equalization is in the German constitution. I guess they skipped that page when writing the EU constitution.
        IMO, this may have been a more effective avenue for the Greeks to pursue (fiscal equalization), back in the spring, rather than the war reparations argument.

        1. washunate

          Yeah, that’s one of the more bizarre blunders as I see it of the Syriza approach. Before the election, Tsipras wrote a letter that was focused on collaboration and shared values.

          But then through the spring, he and Varoufakis appear to have purposefully antagonized the Germans rather than offering a more detailed vision of a collaborative future. They gave off the vibe (whether accurate or not) that they wanted the benefits of integration without the responsibility of tackling domestic oligarchy and corruption and so forth. For all we hear in the Anglo-American world about German austerity and such, they actually have a much more equal society than the UK and the US.

  5. David

    The Greek debt crisis has saved the German government some €100bn (£70bn; $109bn) in lower borrowing costs because investors have sought safety in German bonds, a study has found.

    Maybe this is how the US Fed raises rates, yet keeps the Gov. borrowing costs low enough for solvency. Debt crises for everyone.

  6. Synoia

    3.5% Surplus, plus balance of payments deficit => per Sectoral Balances in MMT Greece is heading for collapse because this will asset strip the private sector.

    When will the Greek Private Sector collapse? In what form?

    My advice to the Greeks – Sell the Islands and impose steep property taxes on properties over E1 or E2 million.

  7. TheCatSaid

    Following from IsabelPS post above, here are a few excerpts from an enlightening article. (Emphasis as per original article)

    Systemic media companies in Greece are members of groups of companies involved in construction and shipping and are in reality unsustainable businesses, financially speaking. In order to remain in operation, they receive hundreds of millions in loans from banks without any guarantees or collateral. They are the financial engine of the triangular relationship. Today ThePressProject reveals the fourth pillar of the relationship, the mechanism that undertakes the laundering and the movement of money between the state, banks and the media. And this is none other than some very odd advertising agencies.

    The money these advertising companies manage comes from the state and the banks. Although the banks are in reality propped up by the taxpayer, both in Greece and elsewhere in Europe, in Greece banks spends millions of euros advertising their “services”, services that don’t really offer their customers anything.

    The list gets even more interesting because of the unequal distribution of the amounts involved. So the leading TV station in Greece in terms of viewers, appears to take less money than an individual journalist, whereas the list also refers to hundreds of websites that were funded, that actually have zero traffic.
    And yet the bigger scandal lurks behind the third category of public money managers: advertising agencies.

    Take for example the case of the advertiser “Cream SA” (an unfortunate choice of name, for an English speaker), which despite its lack of website takes in 1,256,000€.“Fortune SA” on the other hand takes in 370,000€. If at first glance this seems a little unfair, hear us out – by searching through the data we discovered that these two companies have the same owner and comparable boards of directors. So we continued our search using the name of the owner, Vasileios Provelegiadis, and we discovered that he also has a share in the agencies SYN, MUST, CIAMEDIANETWORKHELLAS, GREATING, FAIRPLAY, QUTINET, PRALINE, DEGRECO, CLEMENTE, VIII, GREAT and RAHATI. All of these firms display similar characteristics: they seem to have their headquarters in the same area; they have similar Boards and no substantial market presence. Their activity consists in putting in bids for public contracts and, as we’ve already seen, they have no problem with putting in ‘bids’ for the same projects.

    If it seems odd that just one advertiser has, in recent years, had as take in 12 companies, you’ll be shocked to learn how this ‘tree’ of corruption extends even further. Our research has uncovered that many member of the Boards of the above-named advertising agencies also participate in other agencies independently of Provelegiadi, and the branches of the tree spread even further the more you pursue these names.

    Everything that you’ve read thus far has to do only with two companies (which in reality were just one). But the other companies that appear on “Kammenos’ list” have similar features. In fact, one of these is owned by the wife of Yanis Stournaras, the Governor of the Bank of Greece and non-elected former Minister of Finance in the Samaras administration.

    The full article has eye-opening specifics, including names on a list from one of the members of the current government, and a remarkable tale of how a brand-new ad agency miraculously was formed and won a project contract within 10 days (!!!) of the project being announced.

    Squaring the Triangle of Corruption
    by Costas Efimeros at The Press Project

  8. JTMcPhee

    Is the “Greece” that says “it” has reached a deal (sic) with “the Germans” made up of “The oligarchs” and their fronts?

    I imagine a lot of people born or naturalized into the “Greek polity” don’t think the people who speak for the nominal entity in this situation, the personification labeled “Greece,” have a legitimate claim to do so.

    Do any of us mopes, any more, have the right, let alone the power and the wisdom, to request or demand outcomes from “our” political economy that are other than dead ends for the ordinary people who generate the Real Wealth, but open veins for the kleptocrats and vampire squids to slurp from?

    Just asking.

  9. Handyortung

    The deal in principal would provide for loans of 86 billion euros over three years in exchange for essentially an overhaul of Greece’s economy. The accord still needs eurozone political approval.

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