Of debts, deficits, contingent liabilities and DSAs

by Antonis D. Papagiannidis

Greece will be not singled out in the new round of Brussels tightening the fiscal reins in (hopefully) post-pandemic Europe. Italy at the very least, Spain probably also, will be feeling this tightening through Eurostat’s increasing intrusiveness in matters having to do with contingent liabilities that may soon enough start to feed into budgetary deficits.

The Spanish bad bank approach (known under its acronym SAREB) is of concern as it is reeling under fresh losses in 2020, with an on-going conversion of subordinated debt to equity, already feeding into the country’s deficit.

The Italian GACS bad-loan management system of securitarization/ “cartolarizzazione”, based on State guarantees to free Italian banks of some 80 bn euros in bad loans, is coming under renewed scrutiny; even the country’s own Treasury director A. Rivera (who helped devise “GACS”) is worried that this mountain might almost double under the strain of the pandemic crisis.

So, it should come as no real surprise that Greece’s own “Hercules” scheme, which was thought quite successful up to this point, gets also in the sights of Brussels (the Commission/EcFin) and Luxemburg (meaning Eurostat and ESM). The total of State guarantees under ‘Hercules” may well exceed 20 bn euros. The grim (if not ominous) dimension of the Greek case is that such contingent liabilities of over 10% of GDP hover over a public-sector debt of close to 210% of GDP. No wonder, thus, that Klaus Regling – who has been quite supportive to the Greek case – is recently raising the issue of a credible DSA/Debt Sustainability Analysis commensurate with the need of Greece getting back to some sort of fiscal post-pandemic normal.

The Greek side has been pressing the argument that no “Hercules” guarantees have had to be called. But as former Finance Minister Nikos Christodoulakis recently noted, the fact that of the 226 trillion dollars of global debt overhang some 88 trillion constitute public debt (recent IMF data, “Fiscal Policy for an Uncertain World”) is already causing renewed tremors in finance. So, since less-resilient economies may well be called to carry most of the weight of getting back to some sort of normal, Greece’s own fragility may come anew to the fore.

A country that has been called – under successive “rescue” packages – to produce primary surpluses almost a decade will have now to achieve a 1% surplus in 2022 after living with a 7.3% primary deficit for 2021 (and 9.7% for 2020), Brussels and the ECB allowing. Not a rosy perspective, indeed, however positive the overall perspective of “getting back to normal” sounds.