Greece Runs out of Money, but When?

Currency in Crisis

Troika officials have postponed for the second time the decision on the next tranche of Greek aid under the 2010 agreement. While this seems to tempting the fates and fanning fears of a default, it does not appear that Greece needs the money until the mid-Nov, the new time frame for the Troika's decision. The postponement is probably best understood as part of the brinkmanship tactics that maximize the concessions from Greece.

Earlier today Greek Finance Minister Venizelos indicated that Greece has sufficient cash reserves for redemptions, pensions and salaries until mid-Nov, which incidentally is when the Troika now says they will have their decision.

It is difficult to assess the veracity of the finance minister's claim as previously he seemed to indicate that Greece would run out of funds by mid-Oct. This helps explain the market's heightened sense of anxiety, reflected not only in decline of the euro but also pressure on European and US financial institutions.

Recall too that Greece will raise some funds via a bill sale scheduled for next week. Greek bill sales are also part of a larger story of European government debt supply this month. Gross issuance is expected to be around 70 bln euros. Coupon payments and redemptions should "free up" around 75 bln euros that can fund the purchases of the sovereign issuance.

However, this one of the under-appreciated flaws of the euro zone. When a US Treasury bond matures, the dollars can be re-invested in Treasuries or sold to some one else who will buy a US dollar asset. Yet when a Italian bond, for example, matures, the proceeds can be used to buy a German bund, doing Italy little good and potential harm.

Italy and Spain appear to be lagging behind their historical pace of funding their respective deficits. Italy needs to raise another 40-45 bln euros before the end of the year. Some fraction may be in bills rather than bonds. Spain appears to need another 20-25 bln euros, though the precise amount depends on privatization proceeds. It recently pulled the sale of its lottery and there is much skepticism in the market about how much money privatization is going to realistically raise, not only in Spain, but also in Greece, and through the euro zone.

Our base case remains that Greece will get the next tranche of aid. While more austerity from Greece will be demanded and more vigorous implementation of what they have already agreed to is essential, the Troika need to accept that their growth forecasts for Greece were overly optimistic and these need to be adjusted as well for a more realistic assessment of the key metric: debt/GDP.