How Athens reads the messages of the markets and the IMF

By Tasos Dasopoulos

With bond yields now back in 2019, the financial staff is making adjustments to both the lending strategy and the reduction of deficits and debt.

Regarding the situation, which wants the 10-year title to trade at a yield close to 2.5% and the 5-year at 1.4%, as much as the returns were in April 2019, there is no particular concern. This is because bond yields are rising horizontally in all Eurozone countries and not only in Greece. The main reason is the apparent change of course of the European Central Bank in its monetary policy.

In essence, the Ministry of Finance has taken a stand. Despite the turmoil in the markets since the beginning of the year, Greece came out early and secured 25% of the 12 billion euros of the annual loan program, with the 3 billion euros it raised through the new 10-year bond, with an interest rate of about 1 , 84%, raising cash close to 40 billion euros.

In terms of continuity, the forecast wants yields to continue to rise beyond the shocking unexpected. Of the 38 billion euros in cash today, after the repayment of 7.1 billion euros of the International Monetary Fund and the double installment of the bilateral loan with the Eurozone countries (GLF), an amount of over 30 billion euros will remain . Greece has the “luxury” of not raising funds to meet immediate needs. Therefore, if the yields increase too much, it can wait for the next decline in yields to borrow, covering in the meantime a part of the needs with its cash.

In addition, it has as a “shield” the commitment of the ECB since December. That is, after the expiration of PEPP in March, in addition to the reinvestment in Greek securities that will expire, it will be able to intervene in new securities that have a problem with the markets.

Fiscal adjustment

The IMF, in its report on the Eurozone under Article IV, stressed, among other things, the need for rapid fiscal adjustment, especially for heavily indebted countries such as Greece, Italy, Spain and Portugal.

In fact, he called on these countries to create immediate plans to reduce their debt, which has risen horizontally due to the pandemic.

In this intervention, Athens has to answer forecasts for rapid fiscal adjustment through the rapid economic recovery in 2021 and 2022. The budget predicts a reduction of the primary deficit by the end of the year by about 10 billion euros due to the growth of the previous year which can reach 9% or even higher, based on the latest available data.

At the same time, the debt as a percentage of GDP is expected to decrease in a year by 10% -11% from 206.3% in 2020 to 194% -195% at the end of the year, compared to the 197.1% provided by the budget. In other words, it will cover in one year almost half of the increase of 26%, which it had in 2020 compared to 2019. According to the budget forecast, for growth of 4.5% in 2022, the debt will be further reduced by 7, 5% of GDP by the end of 2023.

The challenge in achieving these goals is to phase out support measures against the effects of the coronavirus, without replacing them with equal support measures in terms of accuracy. And in this matter the financial staff is quite careful in its statements. It is currently monitoring inflation and real needs before finalizing new anti-accuracy measures.