It appears that in the 11th hour, Europe is still unable to decide just what the proper approach to rescuing Greece is. The Sunday Times has
just released information that a plan to be published by Brussels on
Tuesday, titled "Urgent measures to be taken by May 15, 2010" will
demand dramatic Greek austerity measures, such as cutting "average
nominal wages, including in central government, local governments,
state agencies and other public institutions" and proposes new luxury
goods and self-employed taxes. Yet the kicker is that "Richer eurozone countries such as Germany and France would be expected to bail
out Greece in the worst-case scenario, to prevent a disastrous crash in the
value of the single currency" - not very surprisingly, this is precisely the Plan B that Almunia yesterday swore up and down that the EU was not, repeat not,
considering. Moral Hazard has indeed gone global. Yet even with this
bureaucratic memorandum on the table, it seems certain that the EU will
not actually act before Greek deterioration escalates out of control.
Here are the near term catalysts that will likely make the cost of
inactivity very high. Think full Dick Fuld stature when screaming
upright.
But before presenting a timeline of near-term events,
here is a simplified flow-chart of how bond, and CDS, investors should
handicap Greece's near-term future, courtesy of Barclays.
As
the chart highlights, the critical junction occurs once the market
digests the forthcoming fiscal adjustment: should the market deem that
insufficient, the immediate options are two: an EU bailout and an IMF
bailout. We remind readers that the IMF has already pointed out that it
would be willing to provide critical assistance to the Mediterranean
country. In either case, Barclays expects that the "bailout" manifest
itself via a bridge financing which would "buy time for another round
of fiscal adjustment attempts." Logically, if the bridge ends up going
nowhere, then the country will have to evaluate how to deal with a
potential default scenario.
Of course, this flow chart will not
occur in limbo and will be determined by a variety of internal and
external stimuli. BarCap presents the following critical catalysts in
the near-term future which will likely push either the EU or the IMF's
hand sooner rather than later.
- 10 February: National strike.
The strike's intensity and politicians' reactions may provide a first
impression about the government's ability to implement fiscal reforms.
- 16 February: EU Council officially reacts to Greece's 2010 budget (after hearing assessments by EU Commission as well as ECB).
- March: Greek Parliament to vote on Tax law and details of spending cuts.
- April-June:
EU assessment on Greece's budget implementation and decision whether
stricter recommendations (not yet "sanctions") are taken under the
"Excessive Deficit Procedure" (EDP). EU will undertake assessments on
the implementation of fiscal measures very 3-6 months. In parallel, the
Greek Treasury faces the first large redemptions of the year in April
and May and is likely to issue in advance of these dates.
- January
2011: ECB is expected to return to regular collateral procedure. This
implies that Greece would need an A- rating from at least one of the
agencies. Currently Moody's has Greece still two notches above the
critical threshold, but under negative outlook.
Further
to point 4, much has been made recently over Greece's €8 billion bond
issuance. Yet in the near-term the country faces substantial bond
maturities, which will have to be tackled ahead of their April and May
refi dates. The chart below presents the key GGB maturities through the
end of 2011.
