Nomura: 8 Scenarios That Can Help Greece To Reduce Funding Needs

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Nomura expects the Troika to identify a significant funding gap for Greece in a report published on September 11th if the program is to be extended to 2016, and also expects it to forecast debt to GDP in 2020 well above the 120% of GDP target. “Our estimates, which will likely be more pessimistic than the Troika΄s, have a funding gap of €43bn until 2016 and baseline debt to GDP ratio 40pp higher than the target in 2020”, the bank explains.

The report investigates eight scenarios which would help reduce the funding needs and provide debt relief. The key point is that there are scenarios that do not involve a second debt restructuring that could put the programme back on track, but require substantial political willingess by euro area leaders.

According to Nomura, one option to reduce the funding gap is to delay the €9.2bn planned reduction of the T-bills programme for after 2016. A more effective way to close the funding gap is for the IMF to reschedule the repayment of Greece΄s loans, potnetially by transforming the €20.9bn of the original stand-by arrangement (SBA) maturing until 2016 into the extended fund facility (EFF) format that offers a significantly longer repaymnet period.

The ECB (or the finance ministries that can redistribute its profits back to Greece) is an additional and more important source of programme financing and debt relief. “We examine a number of scenarios regarding the additional involvement of the ECB holdings in an attempt to bring the Greek programme back on track. We conclude that the return of the SMP portfolio income profits for now is the most likely outcome as a minimum”, according to the report.

Additional means for the official sector to contribute to Greece include a lowering of the official interest rate charges and the direct recapitalisation of Greek banks by the ESM in due course. The former avenue has the potential to lower Greece΄s debt ratio by up to 16pp until 2020 while the latter can shave off another 16pp. Nomura thinks that there is a reasonable possibility that both options are ultimately used.

On the contrary, the bank think thats on balance the likelihood of a second PSI in Greece is between medium and low at this stage, as the potential costs seem to outweigh the potential benefits. It is worth remembering that although a PSI still includes a sizeable pool of "haircut-able" debt (~50% of GDP) it also requires the restructuring of at least €30bn of official loans through the co-financing structure, which seems to us a bigger hurdle than the other OSI options presented in this note.

This entails significant upside for the trading price of the new GGBs in the event of a positive review by the Troika. A risk here is the usual euro-area procrastination in making important political decisions. This could lead to delays in the full disbursement of the next aid tranche until after the October 18-19 summit. More importantly, final decisions on programme revisions could be deferred well into December 2012. In that event, and assuming that our view on domestic politics is right, the upside potential for GGBs from current levels would be more moderate in the short term, the report explains.

In conclusion, Nomura thinks that despite the obvious political risks involved, a number of market-friendly options exist that offer sufficient space for a compromise to be reached. Such a development would give Greece at least a few more months of breathing space.

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