Pocketful of Miracles: discussing the Greek debt

It is sure that things are not easy negotiating with its ‘partners’ as time goes on. As Latin poet Publilius Syrus once said ‘A small debt produces a debtor; a large one, an enemy’. I am now interested to see where will the negotiations on Greece go within the next few days.

First, let’s review quickly what is going on with Greek’s liabilities.

Greece1

The pie chart above shows us who ‘owns’ Greece’s public debt (Source: Bloomberg). According to the country’s Statistical Authority, Greece’s total public debt amounted to €315.5bn at the end of the third quarter of last year, which corresponds to roughly 180% as a share of the country’s GDP.

As you can see it, the EFSF, the EZ temporary crisis-fighting fund, lent the country €141.8bn (which represents 45% of it) and the current weighted average maturity is 32.38 years with the last payment due in August 2053 according to the fund’s website. As you may have heard at the end of last year, the Board of Directors of the EFSF decided to grant Greece a two-month technical extension. The program will end on February 28th instead of December 31st last year. As a result, the remaining amount available (1.8bn Euros, which will raise the total amount to 143.6bn Euros) could still be disbursed to Greece (in need of assistance) until the end of this month.

Another major ‘creditor’ of Greek’s debt is the ECB, as a result of the Security Markets Programme (SMP), which currently owns about €27bn (i.e. represents 40% of the €67.5bn marketable debt outstanding). However, whereas EFSF loans where principal payments don’t start until 2023, Greek is set to pay 6.7bn Euros held to the ECB this summer (20 July: €3.5bn, 20 August: €3.2bn).

Eventually, the IMF is also an important creditor with 25 billion Euros according to the fund’s website, maturing currently. IMF loans in February and March are €3.5bn. As a reminder, the IMF’s policy is to never restructure its loan.

Therefore, if we add up the Greek Loan Facility (Bilateral Loans), the ECB holdings, the EFSF loans and the outstanding IMF credit, we get 246.7bn Euros, that is to say 78.2% of the total public debt. How convincing will the new Tsipras government be ‘against’ those figures?

It has been a rough start for Greece: the country’s news has been making the headlines since (and before) the election of the new government (January 25th). PM Tsipras has made it clear that Greek debt is unsustainable, condemning the country to a state of perpetual economic recession and deflation, and is trying to negotiate a write off with its debt creditors. In addition to that, he unveiled on Sunday plans to undo several austerity measures: gradually increasing the minimum wage, dropping the recent property tax and promised the retirement age wouldn’t be change (anymore).

However, this will be the tricky part of the deal – asking for a write off while easing austerity measures – as they don’t come together usually. Negotiate a debt write off, press for a relaxation of economic austerity, avoid a bank run, and on the top of that, maintain a political stability. It is interesting to see that investors are considering political risks once again after more than two years of main attention to the ECB and its programs.

However, as many of you, I would agree that the market is underestimating the consequences of a Grexit clearly, not only the costs, but also contagion to other ‘weak’ peripheral economies (i.e. Portugal). What would happen to the Euro if the spread between peripheral and core yields (good sovereign risk indicator) starts to rise once again (like in early 2012)?

EURUSD broke its small resistance at 1.1350 yesterday after a quiet week, and seems on its way to retest the 1.1500 level. We saw earlier this morning that EZ grew by 0.3% in the last quarter of 2014, meaning that the 19-bloc economy grew by 0.9% during 2014, better than the 0.8% expected (see details in Appendix). However, Greek FinMin is making the headlines this morning: ‘Haircut preferable to loan extension’, which is obviously ‘capping the pair on the topside.

A good entry level would be above 1.1460 (if it makes it up there), with a stop above for 1.1530 and a take profit at 1.1300. You can also play the bigger range, setting your stop above 1.1650 and take profit at 1.1200. However, I wouldn’t recommend to be too ‘greedy’ ahead of the Eurogroup meeting on Monday.

Otherwise, I stay strongly bearish on the Euro in the long term (vs. USD and GBP), as growth, monetary policy divergence, Grexit contagion, geopolitical tensions will clearly weigh on the single currency.

Appendix

Greece2

(Source: Eurostat)