Improving Economic Data In Greece Masks Dark Clouds On The Horizon

The latest GDP number out of Greece looks more promising than in the past (assuming it is to be trusted). The GDP contracted by only 0.2% (SA) from the previous quarter and 4.6% on a year-over-year basis.

The Greek government wants to use this opportunity to obtain yet another bailout loan from the EU/IMF. In spite of this slowdown in GDP contraction and a somewhat better fiscal deficit, the Greek government is expected to run out of money by the end of next year.

Barclays Research: - ... the programme could very likely run out of funds before the end of 2014 as lower-than-expected growth last year, extra costs for buybacks and the delays in implementing reforms have opened up a funding gap. In addition, at this stage, we don’t see how Greece could be in a position to return to market funding by the end of 2014, meaning that it will also need its bailout programme extending. Finally, long-term sustainability is still far from obvious and reaching the magical 120% debt-to-GDP ratio by 2020 will require substantial debt-relief measures.

A rift is developing within the IMF over the fund's ongoing disbursements to Greece from funds that have already been committed (see story). The IMF has been pressuring the EU for some time to provide Greece with some "debt relief/extension" - possibly including outright "haircuts" to public sector loans. That means the Eurozone nations will need to accept worse terms and possibly a write-down of some sort in order to make the bailout plan more "sustainable".

The European Commission however is not ready to kick off the discussions on the topic - at least not until after the upcoming German elections in late September. And the idea of relaxing conditions for current funding as well as additional funding for Greece is generating some skepticism in Germany.

The Local: - Germany's central bank expects Greece to receive another bail-out loan later this year or by early 2014, the German weekly Der Spiegel reported Sunday, citing an internal Bundesbank document.

[Bundesbank's] experts however rated the risks of the international loan programme as "exceptionally high" and the Greek government's performance as "barely satisfactory", the magazine said.

The paper's authors also voiced "considerable doubt" about the Greek government's ability to implement essential reforms, said Der Spiegel.

The paper, reportedly written for Germany's finance ministry and the International Monetary Fund (IMF), also criticised the latest credit tranche, saying it had been approved due to "political constraints".

What makes the potential modification of Greek debt particularly troubling is that it can not be viewed in isolation. If Greece receives some form of relaxation of terms, Portugal is right behind them. Portugal will need its loans extended at some point as well, since the nation is unlikely to enter the private markets any time soon. And treating Greece differently from Portugal is not going to be possible. Now the Eurozone may have a double bailout on their hands - something many of the partner nations are unlikely to accept.