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Greece faces two hurdles, today’s no confidence vote and a vote on austerity measures, which, if passed, will lead to the country entering a period of “managed deleveraging,” according to Goldman Sachs’ Francesco Garzarelli.Garzarelli believes that eurozone leaders have put in place an ultimatum with Greece: pass austerity measures, or you won’t get anymore cash. And while, right now, that outcome seems very much uncertain, Garzarelli believes that, if it comes to pass, Greece will enter into a period of “managed deleveraging.”
Until Greece passes new deficit-reducing measures, markets will likely remain on tenterhooks. Our central scenario is still that the fiscal measures will be passed, possibly with some modifications to incorporate inputs from the ND opposition party and to take into account the deterioration in the macro environment. The Eurogroup represents the only accessible source of funds for Greece’s government budget at this juncture.
If the fiscal measures are approved, it will be important to take a step back and look at the bigger picture. As we have commented in previous research (see our note published on 15 June, entitled Greece: A Managed Deleveraging), Greece’s existing public debt is progressively being replaced by public-sector loans at long maturity and affordable rates. A return to a positive cash flow in the public sector (i.e., no new debt being created) is a key condition for such liability transfer to continue. Greece is receiving substantial support from its EMU peers in this direction, although the problem of enforcement remains.
Clearly, this process will be subject to the economic and political cycle, but overall we continue to believe that the medium-term trajectory involves a ‘managed deleveraging’, with the Euro-zone official sector becoming the main creditor of Greece and, eventually, piloting a liability management exercise (further maturity extensions, write-downs or other modifications of public-sector loans). This could be speeded up should the Eurogroup decide to purchase Greek bonds in the secondary market, as we have suggested in our previous publications.
If Greece can get through these two votes, then it may be smooth sailing in terms of its debt position for at least a little bit.
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