Quantitative easing, announced on Thursday by European Central Bank President Mario Draghi, is not going to be as influential in reducing Greece’s borrowing cost as will an agreement between the government formed after Sunday’s national elections and the Troika of the country’s creditors, according to a Goldman Sacks report published Friday.
In the report titled “Greece: Uncertainty to Persist and Peak Well After the Elections,” the investment banking firm said, “As opposed to yields across euro area countries, quantitative easing is not going to be a key factor in the process of the reduction of funding costs for the Greek government and private sector. An agreement that ensues following this Sunday’s election between the government and the Troika is much more important in order for capital markets to open up again for the sovereign and the private sector alike.”
As the majority of Greek debt is held by the Eurozone’s official sector, it said, the level of official interest rates over time and the maturity of debt are much more central in determining how easily the existing government debt stock is serviced.
The report noted that Greece requires official sector funding to meet its obligations in 2015 – between 6 billion and 15 billion euros, depending on economic assumptions. Without that funding, a potential default would ensue. The two main parties at risk are the International Monetary Fund (IMF), with about 8.6 billion euros maturing in 2015, and the European Central Bank (ECB), with about 7 billion euros maturing.
If Greece defaults, particularly with the ECB, the most likely repercussion is that the ECB would likely limit its exposure in relation to the Bank of Greece (BoG). This implies that the ECB would no longer provide cash to Greek banks to withstand fresh withdrawals of deposits. This can happen if the ECB refuses to extend further Emergency Liquidity Assistance (ELA). “In such an event, the domestic economy would contract under cash withdrawal limitations and Cyprus-style capital controls,” it said.
At the same time, the export economy would also shrink as letters of export credit by Greek banks would not be accepted in the global banking system and transactions would be cash-settled (a phenomenon witnessed during the 2011–2012 crisis).
The report said that an agreement with the Troika is necessary to avert such a negative outcome for the Greek economy and for Greek bonds and stocks. Such an agreement would be reasonably straightforward under an administration led by New Democracy, given their election commitments. In contrast, it said, main opposition SYRIZA has pledged to pursue an alternative economic plan, which is at odds with the program framework of the last four years.
Voting in favor of economic programs has, in the past, been costly for parties with a long history and established government credentials. “During such processes, PASOK and New Democracy have shed not only MPs, but also voters’ backing and internal cohesion. SYRIZA would likely be no exception to this experience,” Goldman Sachs said of a parliamentary effort to approve such an agreement. Moreover, expectations (for MPs and the public) have been set quite high during the election campaign. Disappointing those expectations could prove quite costly.
The firm said that a key to negotiations, if SYRIZA wins the elections, is who will be appointed Finance Minister, as that person will be “called on to set the negotiation tone and manoeuver in the event of an impasse in negotiations.”
“The key question in the event that SYRIZA wins the election becomes whether a compromise between international lenders and SYRIZA is possible. While a compromise is possible, SYRIZA would need to make major concessions relative to its current program.
SYRIZA said it has communicated that it is ready to commit to specific reforms at the negotiation table that would likely be viewed in a positive light by the Troika (in the areas of public sector administration and tax administration reform), helping to reduce some of the lenders’ demand on the margin.
“But the gap that separates the economic philosophy of the two sides is large in key areas (such as budget targets, pension system sustainability, labor market reforms and legislation, privatizations and public sector headcount),” the report said. “Lenders are willing to pay the cost of heightened default uncertainty in Greece rather than provide funds for policies that reverse the reforms that have taken place and deviate from economic orthodoxy,” it said in conclusion.