Is Another Greek Debt Haircut Ahead?

The common currency Euro was affected to its greatest extent this past week by concerns that the Eurozone’s policymakers would not release the next bailout payment that was needed to keep the Greek government afloat for a little while longer. Earlier in the week, markets were reassured by no less than German officials who said that the deal was in its final stages, comments which gave the Euro a slight and much needed boost.

That turned out to be short lived, however; now that that payment has been assured, investors have reconsidered the background to that promise and some are now wondering why, in fact, it was even made. According to one forex strategist, the mandates of the recently concluded E.U. policymakers’ meeting weren’t met; specifically, he feels that though the release of the Greek bailout payment is moving ahead, that Greece actually didn’t deserve the additional funding as the evidence wasn’t there to support the reforms that had initially been required of them.

Furthermore, investors are digesting the prospects of the additional reforms for Greece given the new debt targets and wondering where, in fact, they will be coming from. The Greek government has already imposed a tremendous number of wildly unpopular austerity measures that all but assures that growth prospects are nil for many years to come. It would seem that there is nothing left to squeeze so investors (and certainly Greeks) are sure to be wondering what’s in store.

Those concerns are valid; under the new targets the Greek government will be permitted an additional two years in order to reach new budget goals, and the Troika will fund an additional €44 billion while they do it. The forecasts call for Greece to return to a primary budget surplus by 2016, provided they return to growth by 2014. It was also implicitly understood among the Troika participants that Greek debt is going to have to be restructured at some point after the economy has a surplus; a restructuring would mean that some of the Eurozone’s members are going to have to forgive at least some of Greece’s debt.

Achieving Targets

A number of further targets for 2014 through 2016 and beyond were also set for Greece at the recently concluded meeting but the roadmap toward achievement of those targets was clearly absent. While analysts say that the targets are admirable, for example by Greece’s debt-to-GDP target is 175% in 2016, 124% in 2020, 110% in 2022 and finally 88% in 2030, the issue is how does the government go about restoring market confidence now in order to achieve those targets.

One possible way would be with longer maturities on loans coupled with lower interest rates which could allow the Greek government to pay down additional debt. According to the E.U.’s commissioner for Economic and Monetary Affairs, Olli Rehn, further measures beyond just a rate reduction will have to be considered by the E.U. member states, implying to some analysts that a more fundamental debt overhaul is likely. Several of the E.U. members are likely to loudly balk about that prospect – as necessary as it may be – particularly Germany, Austria and Finland.

On the flip side of the debt issue is the growth issue, and many analysts have said that the focus of E.U. policymakers has been much too narrow and that they must consider how to promote growth in the southern parts of the Eurozone. One critic contends that the growth engines must be restarted in Greece, Spain and Italy in order to ensure that the economic drivers, i.e. Germany and France, are not further weighed down.