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.