To exit (to borrow from the markets) or not to exit: Greece’s new dilemma

by Theodore Pelagidis

Brookings Institution
July 21, 2017

Athens desperately needs to sell a 3 billion euro, five-year Greek government bond with a yield of around 4.5-4.7 percent as it strives to convince the markets—as well as domestic voters—that the economy is about to recover after eight years of depression and austerity. So, it is willing to pay much more than the 0.89-1.2 percent that the European Stability Mechanism (ESM) is currently charging as part of Greece’s bailout program. Indeed, on July 11, the ESM announced that 7.7 billion out of a total tranche of 8.5 billion euros would flow to the Greek state, of which 6.9 billion euros will cover loan maturities that expire this month. Then, on July 21, the board of the International Monetary Fund approved in principal a conditional loan worth as much as 1.6 billion euros for Greece—just the reassurance requested by many euro-area creditors. Yet Greece’s Gordian knot is far from untied and the most recent conditional acceptance by the fund regarding what amounts to a “precautionary stand-by arrangement” won’t translate to an immediate disbursement.

The urgent need for a “Grexit” to the global borrowing markets’ either amounts to a symbolic government effort to show investors that the economy is recovering or is something political. Despite recent optimism expressed about the likelihood of a Greed re-entry, its timing is far from guaranteed. According to the latest news, the European Commission, the European Central Bank and the IMF—also known as the troika—seem to have reacted by favoring a postponement of a bond issuance by Greece for the next few days, weeks, or even months. But questions remain, as the troika surely knew in advance about the Greek government’s intentions.

The IMF is insisting that Greece’s debt is hugely unsustainable, especially in the long-term. According to the fund, measures either taken or proposed so far by the Europeans, such as the 15-year interest deferral and maturity extension for some of the European Financial Stability Facility/ESM loans, won’t make the country’s debt burden sustainable. The IMF’s July 20 Debt Sustainability Analysis (DSA) just confirmed this view. Greece is not qualified by any standard to exit its program and re-enter the markets. Among other things, such a move would add new debt to the already colossal burden it currently carries, which is equivalent to around 180 percent of GDP. So, even if Greece successfully borrows with a 4.5 percent interest rate, which will make the debt even more unsustainable, mainly by adding to the government’s gross financial needs (GFN).

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