For many, Greece’s financial troubles have been a kind of never-ending story, with the euro zone pouring money into a bottomless pit. The first Greek bailout, in May 2010, provided €110 billion ($128 billion) to the embattled economy. Not nearly enough, it turned out: so far, no less than €255.9 billion has gone down the bailout pipeline to Athens. But amazingly enough, Greece may soon be in the finishing stretch.
Athens tested market sentiment in July with the release of a five-year bond, and the country’s Public Debt Management Agency, or PDMA, will take another important step this month, in the form of a bond exchange. This will consolidate twenty separate bonds – issued during the haircut of 2012, worth a total of €29.7 billion, and with maturities between 2023 and 2042 –into four or five larger bond issues. The idea is to improve the liquidity of the bonds, which are currently all but untradeable.
The Greek finance ministry plans two or three more bond issues before the official end of the adjustment program on August 20, 2018 to raise around €6 billion. The money will help to make up a planned financial buffer of €15 billion, but the bulk of that sum – €9 billion — will be come in the familiar form of a loan from the European Stability Mechanism, the institution that safeguards the euro’s monetary stability.
The ESM loan will be drawn from the third bailout package, agreed in the summer of 2015. That bailout offered a further €86 billion, of which €40.2 billion has so far been paid out. The €15 billion buffer should be adequate to cover any Greek refinancing operations until the end of 2019. But officials in Athens hope that it will not be needed – it is mainly regarded as reassurance for the financial markets, George Chouliarakis, deputy finance minister, explained to parliament recently.
Prime Minister Alexis Tsipras has also been talking up confidence in his country’s battered financial condition, claiming the country is now on the “path of sustainable growth.” In a recent speech to the Brookings Institution, a US think tank, Mr. Tsipras said “The message is: ‘Trust Greece!’”
The Greek premier knows that trust is crucial for any return to the financial markets. Although in the past his coalition of left-wing and right-wing populists has repeatedly fallen behind with the adjustment program, the Greek government is currently ahead of schedule with fiscal consolidation. The financial markets have rewarded Athens with rising bond prices and falling interest interest rates, meaning a lower risk premium. Last Friday, yields on ten-year Greek bonds dropped to their lowest levels since the bailout began almost eight years ago. Nonetheless, at around 5 percent, rates are still high. In other words: Greece’s finishing straight promises to be an obstacle course.
Representatives from Greece’s creditors will once again meet in Athens on November 27. Before then, the government must pass around 60 more reform measures. The markets are watching closely to see if Athens acts quickly, after two-and-a-half years of delays and prevarication. The third “evaluation round,” assessing Greek compliance, is currently under way. It will be followed by a fourth.
All audits are due to be completed in June 2018, two months before the scheduled end of the adjustment program. That will pave the way for negotiations on debt relief – an important signal for the markets.
Before it comes to this point, however, investors will pay particular attention to developments in the Greek banking sector. In February, the European Central Bank (ECB) will begin stress tests to determine the stability of the four systemic Greek banks. The results will be available in May. With a core capital ratio (tier 1) of around 17 percent, Greek banks are doing well by European standards.
The biggest problem of Greek banks remains bad debt. Around half of all existing loans are non-performing or at risk of default. New provisions or write-offs would put new burdens on the banks, eating into their capital cushion. If more capital is needed, it could come from the third bailout package: this still has €19.6 billion available for that purpose. But that would lead to a nationalization of the four major Greek banks. The alternative would be forcing depositors to pay, in a so-called “bail-in.”
Both options would send disastrous messages, and would represent a massive setback in Greece’s attempt to return to the financial markets. For this reason, the stress test for the banks will help determine Greece’s fate. In financial and government circles, Greek officials are fervently hoping it will go well, with no further capital requirements imposed.
Gerd Höhler is a Handelsblatt correspondent based in Athens, Greece. To contact the author: firstname.lastname@example.org