The Greek cabinet is expected to approve a plan to layoff public sector workers, and approve a draft of its next budget today. But the process has been slowed down by protests across the nation.
Alexander Dobridnt, an official from Angela Merkel’s coalition, said that for Greece to be economically stable again, it needs to exit the Eurozone, at least temporarily.
Now Societe Generale has proposed 3 possible scenarios for Greece:
First, it could make changes to private sector involvement (PSI). As of now, PSI assumes 90% participation rate for 10% haircut on bonds maturing in 2020. This creates cuts of only €13.5 billion through debt exchange and €12.6 billion from bond buybacks, a total about 11.6% of GDP which is a drop in the bucket compared with the nation’s public debt of 160% of GDP. So a few options include:
- Increasing the haircut or broadening the range of eligible bonds under PSI beyond 2020. But increasing the haircut could create a situation in which Greek banks need to be recapitalized, it could re-open talks of a CDS event and could turn from an orderly default to a disorderly one.
- Lower the interest rate on any new bonds issued, though the effects of this would not be seen immediately.
Secondly, the EU and IMF could refuse to release the next tranche of loans and Greece could be forced to leave the Eurozone, which could have a total impact of about 25% of GDP. The immediate impact would be a partial government shutdown, more protests that would impact the economy, an increase in its deficit and a “drachmaisation as the government IOUs would de-facto become a new currency, albeit a very severely devalued and not very readily accepted one.”
- European officials may be willing to offer some stabilisation to the Greek banking sector on the condition that the banking sector remains solvent and, as such, the euro area would have to recapitalise the Greek banking sector. This would only be a measure to limit contagion to the rest of the euro area.
- This could also raise the question of whether Greece could remain in the European Union. If it had to leave the EU it would lose access to the single market (trade bloc) and to other EU programs.
Finally, Greece could choose to default and be forced to leave the Eurozone and the EU. Though this doesn’t seem to be an immediate risk.
For now, other than adjustments to private sector involvement, there could be a privatization fund that would sell Greek assets and use the money to reduce Greek debt, though privatization has already proved unpopular in Greece. Another solution is an increase in assistance from EU structural funds, which would be better than a default on Euro tax payers. And finally, interest rates on funding to Greece could be lowered.