Bailout Number Three On The Horizon
BMI View: The Greek government will likely seek to negotiate a third financial bailout once the current programme expires in 2014. Although this may be relatively straightforward to secure, especially given the progress made thus far on structural reforms and the recent emergence of a primary fiscal deficit, convincing Greece's creditors to allow further debt restructuring in the future will meet with stiff resistance. We still believe that further writedowns will be necessary, but stress that the economic and financial market fallout will be more limited than in 2012.
Despite implementing a deep and wide ranging fiscal austerity programme, the magnitude of Greece's debt liabilities and the severity of the economic depression mean that additional official sector support and debt restructuring will be required in the future. We have previously argued that the troika's baseline projection of government debt falling to 120% of GDP by 2020 was extremely optimistic and unlikely to be met. While we still expect additional restructuring of some sort to take place in the coming years, we believe that the fallout in the financial markets will be more limited compared to the first official haircut in 2012. Indeed, given that the private sector took the brunt of the previous debt restructuring, the official sector (which includes the collective eurozone member states, IMF and European Central Bank) is now at risk from future restructurings.
On the back of efforts to slash state spending and raise tax revenues, the primary fiscal balance returned to surplus during the first seven months of 2013. Although debt interest payments mean that the headline balance is still in the red, the primary surplus nonetheless provides the government with some negotiating power ahead of the next IMF bailout review in September. Moreover, there is already talk both inside and outside of Greece over the need for additional financial support. Most notably, German Finance Minister Wolfgang Schauble stated on August 20 that Athens will need additional aid after the current bailout programme expires in 2014. Furthermore, Schauble indicated that Greece will face a financing gap of around EUR10bn in 2014 and 2015, which could feasibly be covered by additional financial support. There has also been increasing speculation that the interest margin charged on the bailout loans could be further reduced to ease servicing costs.