Category Archives: Greek bailout

18/11/17: ECB Induces Double Error in the EU Policy Markets


In economics, two key market asymmetries/biases lead to the severe reduction in markets efficiency often marking the departure from theoretical levels of efficiency (speed, with which markets incorporate new relevant information into pricing decisions of markets agents) and the practical outcomes. These asymmetries or biases are: information asymmetry and agency problem.

For those, uninitiated into econospeak, information asymmetry (sometimes referred to as information failure), is a situation, in which one party to an economic transaction possesses greater knowledge of facts, material or relevant to the decision, than the other party. For example, a seller may know hidden information about a car on offer that is not revealed to the buyer. In more extreme example, a seller might actively conceal such information from a buyer. This can happen when a seller 'prepares' the car for sale by cleaning the engine, thus removing leaks and accumulations of oil and / or coolant that can indicate the areas where the problems might be.

The agency problem, also referred to as principal-agent problem, arises when an agent, acting on behalf of the principal, has distinct set of incentives from the principal. The resulting risk is that the agent will act in self-interest to undermine the goals and objectives of the principal. An example here would be a real estate agent contracted by the seller, while taking a commission kickback from the buyer. Or vice versa.

Occasionally, both problems combine to produce an even more powerful distortionary result, pushing the markets further away from finding a 'true' (or fundamentals-justified) price point.

Today, we have an example of such interaction. As reported in Euractiv, the ECB has denied the EU Court of Auditors access to data on Greek bailout. (Full story here: http://www.euractiv.com/section/all/news/ecb-denies-eu-auditors-access-to-information-on-greek-bailouts/) The claimed justification: banking secrecy. The result:

  1. There is now clearly an asymmetry in information between the EU, the Court of Auditors, and the ECB when it comes to assessing the ECB actions in the Greek bailout(s). The 'car salesman' (the ECB) has scrubbed out information about the 'vehicle' (the bailout(s)) when presenting it to the 'buyer' and is refusing to show any evidence on pre-scrubbed 'car'.
  2. And there is an agency problem. The ECB is an agent for the EU (and thus an agent relative to the principal - the EU Court of Auditors, which represents the interest of the EU). As an agent, the ECB has a contractual obligation to act in the interest of the EU. But as a part of the Troika in the case of the Greek bailout(s), the ECB is also contracted into a set of incentives to act in concert with other players: the sub-set of the EU, namely the EU Commission and the EFSF/ESM funds, and the IMF. At least one of these agents, the IMF, has a strong incentives to avoid transparent discovery of information about the Greek bailout(s) because these bailout(s) have, potentially, violated the IMF by-laws in lending to distressed countries. Another agent, the EU Commission, has an incentive to conceal the truth about the same bailout(s) in order to sustain a claim that the Greek bailout(s) are(were) a success. The third set of the agents (various EU funds that backed the bailout(s)) has incentives to sustain the pretence that the Greek bailout(s) were within the funds' bylaws and did not constitute state aid to the insolvent government.
In simple terms, the ECB refusal to release information on Greek bailout(s) to the EU Court of Auditors is a fundamental violation of the entire concept of the common market principle that overrides any other consideration, including the consideration of monetary policy independence. This so because the action of the ECB induces two most basic, most fundamental failures into the market: the agency problem and the asymmetric information problem, which are (even when taken independently from each other) the core drivers for market failures.



23/5/16: Greek Debt Sustainability and IMF’s Pipe Dreams


IMF outlined its position on Greek debt sustainability, once again stressing the fact - known to everyone with an ounce of brain left untouched by Eurohopium injections from Brussels and Frankfurt : Greek debt is currently unsustainable.

Here are some details of the IMF’s latest encounter with reality:

Firstly, per IMF: Greek “debt was deemed sustainable, but not with high probability, when the first program was adopted in May 2010. Public debt was projected to surge from 115 percent of GDP to a peak of 150 percent of GDP, primarily because the expected internal devaluation implied declining nominal GDP while fiscal deficits were expected to add to the debt burden, but also because of the decision to forgo a private sector debt restructuring (PSI).”

Several things to note here. The extent of internal devaluation required for Greece is a function of several aspects of Euro area policies, most notably, lack of functional independent currency that can absorb - via normal devaluation - some of the shocks; lack of will on behalf of the EU to restructure official debt owed by Greece to EFSF/ESM pair of European institutions and to the ECB; and effective capture of virtually all Greek ‘assistance’ funds within the banking sector and external financing sector, with zero trickle down from these sectors funding to the real economy. In other words, there were plenty of sources for Greek debt non-sustainability arising from EU construct and policies.

Secondly, “the much deeper-than-expected recession necessitated significant debt relief in 2011-12 to maintain the prospect of restoring sustainability. Private creditors accepted large haircuts;… European partners provided very large NPV relief by extending maturities and reducing and deferring interest payments; and Fund maturities were lengthened…”

Which, of course is rather ironic. Lack of functional mechanisms for the recovery in the Greek case included, in addition to those internal to the Greek economic institutions, also the three factors outlined above. In other words, de facto, 2011-2012 restructuring of debt was, at least in part, compensatory measures for exogenous drivers of the Greek crisis. The EU paid for its own poor institutional set up.

However, as IMF notes, “European partners also pledged to provide additional debt relief—if needed—to meet specific debt-to-GDP targets (of 124 percent by 2020 and well under 110 percent by 2022). Critically for the DSA, the Greek government at the time insisted — supported by its European partners — on preserving the very ambitious targets for growth, the fiscal surplus, and privatization, arguing that there was broad political support for the underlying policies.”

Oh dear, per IMF, therefore (and of course the Fund is correct here), the idiocy of shooting Greece in both feet was of not only European making, but also of Greek making. No kidding: Greek own Governments have insisted (and continue to insist) on internecine, unrealistic and outright stupid targets that even the IMF is feeling nauseous about.

“Serious implementation problems caused a sharp deterioration in sustainability, raising fresh doubts about the realism of policy assumptions, especially from mid–2014. The authorities’ hoped-for broad political support for the program did not materialize…  causing long delays in concluding reviews, with only 5 of 16 originally scheduled reviews eventually completed. The problems mounted from mid-2014, with across-the-board reversals after the change of government in early-2015. Staff’s revised DSA—published in June 2015—suggested that the agreed debt targets for 2020-2022 would be missed by over 30 percent of GDP.”

This is clinical. Pre-conditions for August 2015 Bailout 3.0 were set by a combination of external (EU-driven) and internal (domestic politics-driven) factors that effectively confirmed the absolute absurdity of the whole programme. Yes, the IMF is trying to walk away now from sitting at the very same table where all of this transpired. And yes, the IMF deserves to be placed onto the second tier of blame here. Blame is due nonetheless, as the Fund could have attempted to seriously force the EU hand on changing the programme on a number of occasions, but it continued to support the Greek programme, broadly, even while issuing caveats.

But give a cheer to the Tsipras’ Government utter senility: “Critically, …the new government insisted—like its predecessor—that it could garner political support for the necessary underlying reforms.”


And now onto new stuff.

Per IMF’s today’s note: “developments since last summer suggest that a realignment of critical policy and DSA assumptions can no longer be deferred if the DSA is to remain credible. While there certainly has been progress in some areas under the new program that was put in place in August 2015 with support by the ESM, and growth and primary balance out-turns last year were better than expected, the government has not been able to mobilize political support for the overall pace of reforms that would be required to retain the June 2015 DSA’s still ambitious assumptions of a dramatic, rapid, and sustained improvement in productivity and fiscal performance. In all key policy areas—fiscal, financial sector stability, labor, product and service markets—the authorities’ current policy plans fall well short of what would be required to achieve their ambitious fiscal and growth targets.”

Pardon me here, but I seriously doubt the primary problem is with the Greek Government inability to mobilize political support. Actually, the real problem is that the entire framework is so full of imaginary numbers, that any Government in any state of political leadership will have zero chance at delivering on these projections. Yes, the Greeks are blessed with a Government that would’t be able to replace a battery in a calculator, but now, even with fresh batteries no calculator would be able to solve the required growth equations.

So, we have the IMF conclusion: “Consequently, staff believes that a realignment of assumptions with the evident political and social constraints on the pace and scope of adjustment is needed”. In more common parlance, the IMF has to revise its model assumptions as follows:

Primary surplus (aka - austerity):  The IMF recognizes that current tax rates are already too high in Greece (that’s right, the IMF actually finds Greek tax targets to be self-defeating), while expenditure cuts have been ad hoc, as opposed to structural. Thus, with “…tax compliance rates falling precipitously and discretionary spending already severely compressed, staff believes that the additional adjustment needed to allow Greece to run sustained primary surpluses over the long run can only be achieved if based on measures to broaden the tax base and lowering outlays on wages and pensions, which by now account for as much as 75 percent primary spending… This suggests that it is unrealistic to assume that Greece can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a primary surplus of 3½ percent of GDP.”

This is bad. And it is direct. But IMF wants to make an even stronger point to get through the thick skulls of Greek authorities and their EU masters: “Even if Greece through a heroic effort could temporarily reach a surplus close to 3½ percent of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy
making institutions and projections suggesting that unemployment will remain at double digits for several decades.” ‘Heroic’ efforts - even in theory - are not enough anymore, says the IMF. I would suggest they were never enough. But, hey, let’s not split hairs.

So to make things more ‘realistic’, the IMF estimates that primary surplus long run target should be 1.5 percent of GDP - full half of the previously required. Still, even this lower target is highly uncertain (per IMF) as it will require extraordinary discipline from the current and future Greek governments. Personally, I doubt Greece will be able to run even that surplus target for longer than 5 years before sliding into its ‘normal’ pattern of spending money it doesn’t have.

Growth (aka illusionary holy grail of debt/GDP ratios):  “Staff believes that the continued absence of political support for a strong and broad
acceleration of structural reforms suggests that it is no longer tenable to base the DSA on the assumption that Greece can quickly move from having one of the lowest to having the highest productivity growth rates in the eurozone.”

Reasons for doom? 

  1. “…the bank recapitalization completed in 2015 was not accompanied by an upfront governance overhaul to overcome longstanding problems, including susceptibility to political interference in bank management. …in the absence of more forceful actions by regulators, and in view of the exceptionally large level of NPLs [non-performing loans] and high share of Deferred Tax Assets in bank capital, banks will be burdened by very weak balance sheets for years to come, suggesting that they will be unable to provide credit to the economy on a scale needed to support very ambitious growth targets.” There are several problems with this assessment. One: credit creation is unimaginable in the Greek economy today even if the banks were fully reformed because there is no domestic demand and because absent currency devaluation there is also no external demand. Two: despite a massive (95%+ of all bailout funds) injection into the banking sector, Greek NPLs remain unresolved. In a way, the EU simply wasted all the money without achieving anything real in the Greek case.
  2. lack of structural reforms in the collective dismissals and industrial action frameworks “and the still extremely gradual pace at which Greece envisages to tackle its pervasive restrictions in product and service markets are also not consistent with the very ambitious growth assumptions”.

So, on the net, “against this background, staff has lowered its long-term growth assumption to 1¼ percent… Here as well the revised assumption remains ambitious in as much as it assumes steadfastness in implementing reforms that exceeds the experience to date, such that Greece would converge to the average productivity growth in the euro-zone over the long-term.”


So how bad are the matters, really, when it comes to Greek debt sustainability?

Per IMF: “Under staff’s baseline assumptions, there is a substantial gap between projected
outcomes and the sustainability objectives … The revised projections suggest that debt will be around 174 percent of GDP by 2020, and 167 percent by 2022. …Debt is projected to decline gradually to just under 160 percent by 2030 as the output gap closes, but trends upwards thereafter, reaching around 250 percent of GDP by 2060, as the cost of debt, which rises over time as market financing replaces highly subsidized official sector financing, more than offsets the debt-reducing effects of growth and the primary balance surplus”.

A handy chart to compare current assessment against June 2015 bombshell that almost exploded the Bailout 3.0


As a result of the above revised estimates/assumptions: a “substantial reprofiling of the terms of European loans to Greece is thus required to bring GFN down by around 20 percent of GDP by 2040 and an additional 20 percent by 2060,…based on a combination of three measures..:

  • Maturity extensions: An extension of maturities for EFSF, ESM and GLF loans of, up to 14 years for EFSF loans, 10 years for ESM loans, and 30 years for GLF loans could reduce the GFN and debt ratios by about 7 and 25 percent of GDP by 2060 respectively. However, this measure alone would be insufficient to restore sustainability.
  • …Extending the deferrals on debt service further could help reduce GFN further by 17 percent of GDP by 2040 and 24 percent by 2060, and …could lower debt by 84 percent of GDP by 2060 (This would imply an extension of grace periods on existing debt ranging from 6 years on ESM loans to 17 and 20 years for EFSF and GLF loans, respectively, as well as an extension of the current deferral on interest payments on EFSF loans by a further 17 years together with interest deferrals on ESM and GLF loans by up to 24 years). However, even in this case, GFN would exceed 20 percent by 2050, and debt would be on a rising path.
  • To ensure that debt can remain on a downward path, official interest rates would need to be fixed at low levels for an extended period, not exceeding 1½ percent until 2040. …Adding this measure to the two noted above helps to reduce debt by 53 percent of GDP by 2040 and 151 percent by 2060, and GFN by 22 percent by 2040 and 39 percent by 2060, which satisfies the sustainability objectives noted earlier”.

So, in the nutshell, to achieve - theoretical - sustainability even under rather optimistic assumptions and with unprecedented (to-date) efforts at structural reforms, Greece requires a write-off of some 50% of GDP in net present value terms through 2040. Still, hedging its bets for the next 5 years, the IMF notes: “Even under the proposed debt restructuring scenarios, debt dynamics remain highly sensitive to shocks.”

In other words, per IMF, with proposed debt relief, Greece is probabilistically still screwed.

Which, of course, begs a question: why would the IMF not call for simple two-step approach to Greek debt resolution:

  • Step 1: fix interest on loans at zero percent through 2040 or 2050 (placing bonds with the ECB and mandating the ECB monetizes interest on these bonds payable by EFSF/ESM et al). Annual cost would be issuance of ca EUR 2 billion in currency per annum - nothing that would add to the inflationary pressures in the euro area at any point in time;
  • Step 2: require annual assessment of Greek compliance with reforms programme in exchange for (Step 1).

Ah, yes, I forgot, we have an ‘independent’ ECB… right, then… back to imaginative fiscal acrobatics.

One has to feel for the Greeks: screwed by Europe, screwed by their own governments and politically ‘corrected’ by the IMF. Now, wait, of course, all the upset must be directed toward getting rid of the latter. Because the former two cannot be anything else, but friends…

10/8/15: Europe: Where All Do What None Believe In


Here is Bloomberg report on the Finnish Government coalition position on the Greek Bailout 3.0 which, in simple terms, implies that at this stage, no one, save for Brussels and ESM, believes that the Greek Bailout can work. And yet everyone votes in favour of the bailout.

You can't make this up.

Per Bloomberg: "The Finns party, which in April became part of a ruling coalition for the first time, has no choice but to support a bailout since not doing so would cause the three-party government to collapse. That would only open the door for the left-wing opposition, Soini said."

Of course, as we all know, were the Left wing opposition to come to power in Finland, it too will vote for that which they think won't work. Promptly. Without kicking any fuss. Just as Syriza is doing now in Greece.

It no longer matters who, where and why is in power in Europe, as everyone - on political Left, Right and Centre - is hell-bent on doing that which none of them believe in. Except for the Middle Earth of EU 'institutions' who believe in nothing and hence have all the power to do precisely that which they believe in...

14/7/15: IMF Update on Greek Debt Sustainability


Predictably... following yet another leak... the IMF has been forced to publish its update to the 'preliminary' Greek debt sustainability note from early July. Here it is in its full glory or, rather, ugliness: http://www.imf.org/external/pubs/ft/scr/2015/cr15186.pdf?hootPostID=2cd94f17236d717acd9949448d794045.

As discussed in my earlier post here: http://trueeconomics.blogspot.ie/2015/07/14715-brave-new-world-of-imf-debt.html, Greek debt to GDP ratio is now expected to "The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program."

Which means that "Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far."

Under the current programme (running from November 2012 through March 2016) the IMF projected "debt of 124 percent of GDP by 2020 and “substantially below” 110 percent of GDP by 2022", specifically, the projected debt at 2022 was 105%. Now, the Fund estimates 2022 debt at 142% of GDP.

Furthermore, "Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective."

Worse, on the current path "Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term."

And IMF pours cold water over its own dream-a-little target of 3.5% primary surpluses for Greece. "Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so." Note the word decades! Now, IMF rejoins Planet Reality raising "doubts about the assumption that such targets can be sustained for prolonged periods."

In short - as I said earlier, politics not economics drive Eurogroup decision making on Greece. The IMF is now facing a stark choice: either engage with the euro area leadership in structuring writedowns (potentially also extending maturities of its own loans to Greece) or walk away from the Troika set up (and still extend maturities on its own loans to Greece).

Little compassion for the Fund, though - they made this bed themselves. Now's time to sleep in it...

14/7/15: The Brave New World of IMF Debt Sustainability Analysis


According to the secret IMF report released to the European leaders prior to the Sunday-Monday summits, "The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date - and what has been proposed by the ESM."

This is reported by Reuters here.

Per IMF report,that completes the Debt Sustainability Analysis released earlier this month (see the link to the original published report here) and that already concluded that Greek debts were not sustainable, accounting for the effects of capital controls and other recent factors, to address sustainability of Greek debt into 2020s:

  1. The EU (euro area) will need to extend graced period on Greek debt repayments to the ECB and the euro area to 30 years from now, and (not or)
  2. Dramatically extend maturity of debt given to Greece under previous programmes and the new upcoming programme.

Barring the above - which are not in the proposed Bailout 3.0 package - the euro area member states will have to "make explicit annual fiscal transfers to the Greek budget or accept "deep upfront haircuts" on their loans to Athens". In other words - either there will have to be direct aid or direct up front write downs to the debt. These too are not in the current proposal for Bailout 3.0.

Despite this damning analysis, the IMF continues to insist that it will be a part of the new arrangement and will have a new agreement with Greece comes March 2016 when the current one ends. In other words, political arm of the IMF (aka Madame Lagarde and national representatives of the EU) are now directly, head-on, and forcefully in a contradiction to their own technical team assessment of the situation. Madame Lagarde was present at the Sunday-Monday meetings and produced no apparent progress on the what her own technical team says will be a necessary part of any sustainable solution to the crisis.

There is an added component to all of this: IMF analysis refers to a significant deterioration in banking sector situation in Greece since the introduction of capital controls. Which makes sense - there are no new deposits coming into the system and, one can easily assume, loans due are not being serviced. This, in turn, begs a question as to how realistic are the EU-own assessments that the Greek banks will require EUR12-25 billion in capital.

How dire is the situation with Greek debt?

IMF new report projects debt to GDP ratio peaking at above 200% - which is bang on with my estimates previously - up on the previous IMF estimate of peak at 177%. By 2022, IMF estimated Greek debt will decline to 142% of GDP (that is back from the previous 'secret' report linked above). Now, the Fund says debt will stay at 170% of GDP even by 2022.

As Retuers reports, "Gross financing needs would rise to above the 15 percent of GDP threshold deemed safe and continue rising in the long term".

"In the laconic technocratic language of IMF officialdom, the report noted that few countries had ever managed to sustain for several decades the primary budget surplus of 3.5 percent of GDP expected of Greece." In other words, the holly grail of massive and continuous long-term primary surpluses - the sole pillar underpinning previous positive assessments of the Greek debt sustainability by the IMF - is now gone. Realism prevails - no country can sustain such surpluses indefinitely. Surprisingly, IMF continues to insist on 3.5% primary surpluses target.

As a reminder, IMF has called for official sector debt write downs for Greece in the past. It still insists on the same (per technical team), but does nothing from the political leadership point of view.

Conclusion: IMF is now fully torn between its political wing - dominated by the EU representation and leadership - and its technical side. Unlike a unified and functional World Bank (led by the US), the IMF has fallen into the European orbit of dysfunctional politicking and funding programmes that are far from consistent with IMF-own standards. (To see some evidence of this, read this excellent essay from Bruegel). 

IMF's role in the Greek bailout 3.0 will go down in history as a direct participation in the wilful re-writing of the European system of governance to embrace politicised leadership over calm and effective economic policy structuring. As per Eurogroup, there is no longer any doubt that the euro area leadership is wilfully incapable of resolving the Greek crisis. Incompetence no longer counts - the euro area finance ministers and prime ministers had all necessary information to arrive at the only logical conclusion: debt writedowns are needed and are needed upfront. They opted to ignore these so politics can prevail over economics and finance, allowing for subsequent consolidation of the euro area systems and institutions without a clear path for any member state to deviate from such.

Greece is just the first roadkill on this path.


Update: WSJ covers the topic of IMF dilemma.