What’s on the table for Greece?

The Greek challenge muddles on and commentators gloat at the continuing opportunity to talk of the multi-act Greek tragedy.

Looking through what’s on the table, the EFSF are to provide a total of €93.7bn, of which €30bn will be used to support the Greek debt restructuring (PSI), €35bn to buy the ECB portfolio at cost, €5.7bn to pay arrears on coupon payments and €23bn to recapitalise the banking sector. We doubt the EFSF will be able to fund that on the market, so that’s an uncertainty.

Turning to the austerity measures, there are challenges as these are supposed to take Greek debt down to 120% of GDP at the end of this decade, but this looks optimistic as the austerity measures will constrain growth and by extension tax, and will also add to the like-for-like cost of social security provision.

As for the role of the ECB, it looks as if the ECB potential participation would be the approximate one third haircut on the ECB portfolio nominal value. This means that it would not remove totally the seniority argument on the ECB portfolio, as the haircut supported by the ECB is considerably smaller than that of private investors.

When all is said and done, the PSI is necessary but not sufficient to save Greece: quite simply the imbalances are too wide to be solved by any debt restructuring. There is the budget deficit, external imbalances and international competitiveness and no growth.

Euroland finance ministers downgraded the Eurogroup meeting to a teleconference instead of a formal meeting due to Greek delays in meeting Euroland conditions for a new support program. The two main stumbling points have been a need for €325m more budget cuts and signed letters of commitment to the austerity program from the leaders of Greece’s three main parties. Greek officials said that New Democracy party leader Samaras will deliver the letter of commitment that EU leaders have demanded today. According to the FT, documents circulated from the “euro working group” indicate that the PSI could begin as early as Friday and be completed by the end of the month.

Meanwhile China’s central bank governor has asserted Chinese support for Euroland. Governor Zhou said that the share of euro in China’s reserves has not fallen and that China wants the euro to play a larger role as a reserve currency. He stated that China specifically and the BRIC countries more generally are willing to support Euroland, but are waiting for the appropriate time to do this. He reiterated that Euroland should “innovate” to produce instruments with better return profiles. Mr Zhou said that China could support Euroland through the EFSF or IMF with funding from the central bank, China’s sovereign wealth fund (CIC), or China’s development banks such as the China Development Bank or Export-Import Bank.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla