Greece will dominate headlines out of Europe this week as Greece’s newly-elected prime minister Antonis Samaras begins attempts to renegotiate the terms of the Greek bailout package with international creditors.On Wednesday, Samaras meets with Jean-Claude Juncker, head of the eurozone finance ministers, before meeting with German chancellor Angela Merkel on Friday and French prime minister François Hollande on Saturday.
Everyone is expecting Samaras to ask creditors for a two-year extension on the repayment of bailout loans, which under the current arrangement need to start being repaid in 2013.
According to a report this weekend, the Greek finance ministry calculated the relief of such a two-year extension – by their figures, it would reduce the economic contraction by 3 per cent in 2013 and raise growth by 2 per cent in 2014.
The bailouts that Portugal and Ireland have negotiated with creditors don’t begin repayments until the second half of 2015, so an extension to the current repayment arrangements for Greece would bring them in line with the terms of other countries who are having considerably less economic trouble at the moment.
Deutsche Bank fixed-income strategists said in a recent note to clients that creditors have two additional options for renegotiating Greece’s bailout package:
- A large portion of Greek debt has been transferred to public sector balance sheets over the past few years, especially that of the ECB. Since the ECB is a senior creditor to Greece, the country will have to repay the full face value of the bonds to the ECB when they mature. If Greece were to finance the €7.1 billion of bond redemptions in 2013 and €10.0 billion in 2014 by issuing additional t-bill debt, Deutsche Bank estimates it could save as much as €23.8 billion from 2013-2015.
- Greece received two major loans as part of its previous bailouts. The first loan was extended by the EU interest rate was set at the Euribor interbank lending rate plus 1.5 per cent. The second one was granted by the EFSF, and while that one could be “politically tricky” to renegotiate, according to Deutsche Bank, the EU could get rid of the extra 1.5 per cent premium on the first loan, reducing repayment charges for Greece by €800 million per year.
Here are the savings Greece could achieve in negotiations this week from each of the three sources of potential funding relief, according to Deutsche Bank:
Photo: Deutsche Bank
However, BofA Merrill Lynch Europe economist Laurence Boone is not so optimistic on negotiations. Last week in a note to clients, he wrote that muddling through in Greece “will continue and sorely try the patience of the Troika” and that he expects “further measures are taken to prepare for the rising probability of an exit [from the euro] in the medium term.”
Citi strategists are likewise downbeat, saying that although Germany will be more open to compromise during negotiations, it won’t matter much in the medium term and will be cut off in December.
From a Citi note previewing the meetings in Europe this week:
For Greece, these meetings come in preparation for negotiations with the Troika, which is due to return to Athens on 1 September. We believe Germany will be open to a compromise, provided it does not require further disbursements. While Greece is ultimately looking more likely to pass the Troika assessment, our economists still believe that Greece will be unable to pass the austerity measures even under an extended programme and they expect Troika funding will cease following December’s assessment.
Regardless, markets will be watching to see if Greece re-emerges as a major source of tail risk in the eurozone this week following several crucial meetings for Samaras.