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Despite a recent agreement by the Eurogroup and the IMF on releasing further assistance for Greece under its bailout programme, the outlook for Eurozone economies remains weak and the region’s sovereign debt crisis is likely to stay with us for a number of years, according to QNB Group. 

On November 27th, after a number of attempts, Eurozone finance ministers along with the IMF finally agreed to a series of measures that aim to reduce Greek debt from current levels of close to 200% of GDP to 124% by 2020, and lower than 110% by 2022. The measures involved: cutting interest rates on bailout loans; extending maturities of loans; returning profits made by the European Central Bank (ECB) on the purchase of Greek bonds to Greece; and buybacks of Greek debt by the Eurozone from the private sector.

The agreement cleared the way for the release of €34.4bn in bailout funds in mid December, €23.8bn of this is for bank recapitalisation and €10.6bn for financing the Greek budget. The funds were originally scheduled to be released in May and Greece has been kept afloat by emergency loans since then. However, Eurozone national parliaments still need to approve the changes to the terms of the bailout, leaving some uncertainty. A further €9.3bn in aid was approved for disbursal in three tranches in Q1 2013, although this will remain conditional on Greece meeting structural reform targets.

A high degree of uncertainty continues to surround the agreement, particularly in relation to bond buybacks. The IMF has refused to release its portion of bailout funds until the buyback transactions are completed. By buying back Greek bonds from the private sector at prevailing distressed market prices, Greece could avoid having to repay the full notional value of some of its bonds at maturity.

The buyback transaction will be carried out at November 23rd closing prices. According to QNB Group, this provides little incentive for private sector holders of Greek bonds to participate in the buyback, since Greek bond prices have risen and since holding Greek bonds until maturity may be preferable. Therefore, there is likely to be strong private sector resistance.

The buyback programme accounts for a large proportion of Greece’s planned debt reduction and is therefore central to its success. If the buyback fails to meet expectations, another round of bailout negotiations and adjustments would probably need to be made to the bailout package, according to QNB Group. The persistent failure of bailout packages could eventually lead to official creditors (the European Commission (EC), the ECB and even the IMF) being forced to take a haircut on Greek debt some time in 2014-15 to make Greek debt sustainable.

In any case, alongside debt forgiveness and favourable bailout loan terms, Greece still needs to boost economic growth to ensure it can manage its debt. Real GDP is expected to contract by 6.0% in 2012 and by 4.2% in 2013, held back by spending cuts and tax increases. As long as Greece remains in recession, which is likely in the short to medium term, it will continue to need further external support. Included in the bailout package is a tough programme of economic reforms aimed at making the economy more competitive and boosting growth.


A weak growth outlook across the Eurozone does not bode well for a resolution to the region’s sovereign debt crisis, as growth is necessary to make current debt levels sustainable. Overall, real GDP is expected to contract by 0.4% in 2012 and increase marginally by 0.1% in 2013. Growth in the largest economies, Germany and France, is expected to remain weak while recession is expected to continue in the southern economies with the most severe sovereign debt issues (Spain, Italy, Cyprus, Portugal and Greece).

There have been recent indications of a weakening in the largest Eurozone economy, Germany, where: GDP slowed to 0.4% year-on-year in Q3 2012, down from 1.7% in Q1; the German Ifo Business Climate Index, which measures expectations for the next six months, was 101.4 on November 24th, down from 108.3 in January; and the German Manufacturing Purchasing Manager’s Index was 46.8 in November, a level that indicates contraction.

France has also faced a deteriorating outlook. It was downgraded by one notch from AAA by Moody’s rating agency in November, having been downgraded by Standard and Poor’s in January. Public debt has reached 90% of GDP while rising labour costs (owing to high employment taxes and an inflexible labour market) are leading to declining competitiveness and economic growth remains slow. Reforms have been perceived as insufficient, leading to a worsening outlook for the economy and an expected increase in debt to GDP levels.

Furthermore, Spain’s financing needs are likely to force it to ask for international aid in early 2013. Additionally, Cyprus requested a bailout in November, which is expected to total up to €17.5bn, but the exact package is still being finalised.

In summary, the outlook for the Eurozone is poor with downside risks. New countries are likely to ask for bailouts and existing bailout programmes are on shaky ground. The bailout programmes and pressures from investors or rating agencies are likely to lead to greater fiscal austerity, dampening economic growth, which is already feeble. Without growth, sovereign debt is only likely to become less sustainable. Therefore, according to QNB Group, it is going to take several years before the Eurozone will be truly rid of its sovereign debt issues and growth returns to full potential.

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