Wednesday, May 25, 2016

24/5/16: Greek Crisis: Old Can, Old Foot, New Flight


So Eurogroup has hammered out yet another 'breakthrough deal' with Greece, not even 12 months after the previous 'breakthrough deal' was hammered out in August 2015. And there are no modalities to discuss at this stage, but here's what we know:

  1. IMF is on board. Tsipras lost the insane target of getting rid of the Fund; and Europe gained an insane stamp of approval that Greece remains within the IMF programme. Why is this important for Europe? Because everyone - from the Greeks to the Eurocrats to the insane asylum patients - knows that Greece is insolvent and that any deal absent massive upfront commitments to debt writedowns is not sustainable. However, if the IMF joins the group of the reality deniers, then at least pro forma there is a claim of sustainability to be had. Europe is not about achieving real solutions. It is about propping up the PR facade.
  2. With the IMF on board we can assume one of two things: either the deal is more realistic and closer to being in tune with Greek needs (see modalities here: http://trueeconomics.blogspot.com/2016/05/23516-debt-greek-sustainability-and.html) or IMF once again aligned itself with the EU as a face-saving exercise. The Fund, like Brussels, has a strong incentive to extend and pretend the Greek problem: if the Fund walks away from the new 'breakthrough deal', it will validate the argument that IMF lending to Greece was a major error. The proverbial egg hits the IMF's face. If the Fund were to stay in the deal, even if the EU does not deliver on any of its promises on debt relief, the IMF will retain a right to say: "Look, we warned everyone. EU promised, but did not deliver. So Greek failure is not our fault." To figure out which happened, we will need to see deal modalities.
  3. What we do know is that Greece will be able to meet its scheduled repayments to EFSF and ECB and the IMF this year, thanks to the 'breakthrough'. In other words, Greece will be given already promised loans (Bailout 3.0 agreed in 2015) so it can pay back previous extended loans (Bailouts 1.0 & 2.0). There are no 'new funds' - just new credit card to repay previous credit card. Worse, Greece will be given the money in tranches, so as to ensure that Tsipras does not decide to use 'new-old' credit on things like hospitals supplies. 
  4. Greece is to get some debt reprofiling before 2018 - one can only speculate what this means, but Eurogroup pressie suggested that it will be in the form of changing debt maturities. There are two big peaks of redemptions coming in 2017-2019, which can be smoothed out by loading some of that debt into 2020 and 2021. See chart below. Tricky bit is the Treasury notes which come due within the year window of maturity and will cause some hardship in smoothing other debts maturities. However, this measure is unlikely to be of significant benefit in terms of overall debt sustainability. Again, as I note here: http://trueeconomics.blogspot.com/2016/05/23516-debt-greek-sustainability-and.html Greece requires tens of billions in writeoffs (and that is in NPV terms).
  5. All potentially significant measures on debt relief are delayed until post-2018 to appease Germany and a number of other member states. Which means one simple thing: by mid-2018 we will be in yet another Greek crisis. And by the end of 2018, no one in Europe will give a diddly squat about Greece, its debt and the sustainability of that debt because, or so the hope goes, general recovery from the acute crisis will be over by then and Europeans will slip back into the slumber of 1.5 percent growth with 1.2 percent inflation and 8-9 percent unemployment, where everyone is happy and Greece is, predictably, boringly and expectedly bankrupt.

Source: http://graphics.wsj.com/greece-debt-timeline/

Funny thing: Greece is currently illiquid, the financing deal is expected to be 'more than' EUR10 billion. Greek debt maturity from June 1 through December 31 is around EUR17.8 billion. Spot the problem? How much more than EUR10 billion it will be? Ugh?..So technically, Greece got money to cover money it got before and it is not enough to cover all the money it got before, so it looks like Greece is out of money already, after getting money.

As usual, we have can, foot, kick... the thing flies. And as always, not far enough. Pre-book your seats for the next Greek Crisis, coming up around 2018, if not before.

Or more accurately, the dead-beaten can sort of flies. 

Remember IMF saying 3.5% surplus was fiction for Greece? Well, here's the EU statement: "Greece will meet the primary surplus targets of the ESM programme (3.5% of GDP in the medium-term), without prejudice to the obligations of Greece under the SGP and the Fiscal Compact." No,  I have no idea how exactly it is that the IMF agreed to that.

And if you thought I was kidding that Greece was getting money solely to repay debts due, I was not: "The second tranche under the ESM programme amounting to EUR 10.3 bn will be disbursed to Greece in several disbursements, starting with a first disbursement in June (EUR 7.5 bn) to cover debt servicing needs and to allow a clearance of an initial part of arrears as a means to support the real economy." So no money for hospitals, folks. Bugger off to the corner and sit there.

And guess what: there won't be any money coming up for the 'real economy' as: "The subsequent disbursements to be used for arrears clearance and further debt servicing needs will be made after the summer." This is from the official Eurogroup statement.

Here's what the IMF got: "The Eurogroup agrees to assess debt sustainability with reference to the following benchmark for gross financing needs (GFN): under the baseline scenario, GFN should remain below 15% of GDP during the post programme period for the medium term, and below 20% of GDP thereafter." So the framework changed, and a target got more realistic, but... there is still no real commitment - just a promise to assess debt sustainability at some point in time. Whenever it comes. In whatever shape it may be.

Short term measures, as noted above, are barely a nod to the need for debt writedowns: "Smoothening the EFSF repayment profile under the current weighted average maturity: Use EFSF/ESM diversified funding strategy to reduce interest rate risk without incurring any additional costs for former programme countries; Waiver of the step-up interest rate margin related to the debt buy-back tranche of the 2nd Greek programme for the year 2017". So no, there is no real debt relief. Just limited re-loading of debt and slight re-pricing to reflect current funding conditions. 

Medium term measures are also not quite impressive and amount to more of the same short term measures being continued, conditionally, and 'possible' - stress that word 'possible', for they might turn out to be impossible too.

Yep. Can + foot + some air... ah, good thing Europe is so consistent... 

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