Group Economics
Daily Insight
Macro & Financial Markets Research Nick Kounis, Hyung-Ja de Zeeuw & Maritza
IMF: Greece needs debt relief
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3 July 2015
IMF report confirms Greece’s debt is unsustainable and that debt relief is necessary ECB expands asset purchases to selected corporate bonds – with a potential pool of EUR 220bn US job market remains firm and should keep Fed on track for a rate hike in September
IMF report signals Greece needs at least EUR 50bn programme and debt relief
Potential pool of eligible corporate bonds
The IMF’s updated debt sustainability analysis for Greece makes grim reading. It shows that the deterioration in the economic, financial, and fiscal situation in the country have
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made debt dynamics even more challenging. Indeed, the IMF
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now sees the government debt ratio falling to 150% GDP in
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2020, from 177% this year. The GDP growth assumptions underlying the analysis are too optimistic in our view, so the debt ratio may even end up higher. The last time the IMF made a debt sustainability analysis, the debt ratio was seen declining to 128% GDP over that time horizon. The new analysis makes
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an even stronger case that the debt is unsustainable and that
period on EU loans to 20 years and the amortization period to
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EUR outstanding
the country will need debt relief. The IMF suggests that one option to repair sustainability would be to extend the grace
PT
Source: ABN AMRO Group Economics, ECB, Bloomberg
40 years. The IMF also estimates that a new 3-year programme (October 2015 – end-2018) would need to amount
US job growth a bit softer than expected
to at least EUR 50bn, requiring European money of EUR 36bn.
US job growth cooled down a bit in June after reaching a five month high in May. Nonfarm employment increased 223K,
ECB expands list to include non-financial corporates
down from a revised 250K in May. Even with this slowdown,
On Thursday, the ECB surprisingly added 13 new names to its
June’s increase is still above the average of the first five
list of eligible assets under its Expended Asset Purchase
months of the year. The unemployment rate edged down to
Programme. Three of those were corporates SNAM, Terna
5.3% from 5.5% the previous month, partly as a result of 432K
and Enel. All are investment grade utilities and all are (partly)
people dropping out of the labour force. Meanwhile, measures
owned by the Italian government. In all cases, securities are
of underutilisation of labour were mixed. Persons employed
issued by the finance entity of these corporates, which the
part-time for economic reasons fell to 10.5% from 10.8% the
ECB apparently sees as financial corporation other than credit.
previous month, while the participation rate fell to 62.6% from
However, for investors this does mark a big policy change
62.9%.
because to them the three earlier mentioned corporates are classified as corporate credits.
Wage growth subdued Wage growth was unchanged in June after a 0.2% rise the
Potential pool of corporates of utilities EUR 50bn
previous month. On a year-on-year basis, wage growth was
The potential pool of utilities that are included in the ECB asset classification
"Financial
corporations
other
than
credit
institutions" is a little over EUR 50bn. The vast majority of the bonds, EUR 21bn, are from Spanish corporates followed by EUR 11bn from German corporates (see chart). However, if all
2.0%, edging down from 2.3% the previous month. Although wage growth is the weaker part of this report, we expect wages to catch up as the economy strengthens. Stronger wage growth would complete the picture of a healthy job market.
the corporate bonds under the classification "Financial corporations other than credit institutions" would be taken into
Overall, we think the labour market report should keep the Fed
consideration, the pool would grow to EUR 220bn.
on track for a September lift-off.