Showing posts with label Greece and IMF. Show all posts
Showing posts with label Greece and IMF. Show all posts

Wednesday, May 25, 2016

25/5/16: IMF's Epic Flip Flopping on Greece


IMF published the full Transcript of a Conference Call on Greece from Wednesday, May 25, 2016 (see: http://www.imf.org/external/np/tr/2016/tr052516.htm). And it is simply bizarre.

Let me quote here from the transcript (quotes in black italics) against quotes from the Eurogroup statement last night (available here: Eurogroup statement link) marked with blue text in italics. Emphasis in bold is mine

On debt, I certainly think that we have made progress, Europe is making progress. Debt relief is firmly on the agenda now. Our European partners and all the other stakeholders all now recognize that Greece debt is unsustainable, is highly unsustainable, they accept that debt relief is needed.

Do they? Let’s take a look at the Eurogroup official statement:

Is debt relief firmly on the agenda and does Eurogroup 'accept that debt relief is needed'? "The Eurogroup agrees to assess debt sustainability" Note: the Eurogroup did not agree to deliver debt relief, but simply to assess it. Which might put debt relief on the agenda, but it is hardly a meaningful commitment, as similar promises were made before, not only for Greece, but also for other peripheral states.

Does Eurogroup "recognize that Greece debt is unsustainable, is highly unsustainable"? No. There is no mentioning of words 'unsustainable' or 'highly unsustainable' in the Eurogroup document. None. Nada. Instead, here is what the Eurogroup says about the extent of Greek debt sustainability: "The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments." Does this sound to you like the Eurogroup recognized 'highly unsustainable' nature of Greek debt? Not to me...

Furthermore, relating to debt relief measures, the Eurogroup notes: “For the medium term, the Eurogroup expects to implement a possible second set of measures following the successful implementation of the ESM programme. These measures will be implemented if an update of the debt sustainability analysis produced by the institutions at the end of the programme shows they are needed to meet the agreed GFN benchmark, subject to a positive assessment from the institutions and the Eurogroup on programme implementation.” Again, there is no admission by the Eurogroup of unsustainable nature of Greek debt, and in fact there is a statement that only 'if' debt is deemed to be unsustainable at the medium-term future, then debt relief measures can be contemplated as possible. This neither amounts to (1) statement that does not agree with the IMF assertion that the Eurogroup realizes unsustainable nature of Greek debt burden; and (2) statement that does not agree with the IMF assertion that the Eurogroup put debt relief 'firmly on the table'.

More per IMF: Eurogroup “…accept the methodology that should be used to calibrate the necessary debt relief. They accept the objectives in terms of the gross financing need in the near term and in the long run. They even accept the time periods, a very long time period, over which this debt has to be met through 2060. And I think they are also beginning to accept more realism in the assumption.

Again, do they? Let’s go back to the Eurogroup statement: “The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments.” Have the Eurogroup accepted IMF’s assumptions? No. It simply said that things might change and if they do, well, then we’ll get back to you.

Things get worse from there on.

IMF: “We have not changed our view on how the outlook for debt is looking. We have not gone back. We want to assure you that we will not want big primary surpluses.” This statement, of course, refers to the IMF stating (see here) that Greek primary surpluses of 3.5% assumed under the DSA for Bailout 3.0 were unrealistic. And yet, quoting the Eurogroup document: the new agreement “provides further reassurances that 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.”  So, IMF says it did not surrender on 3.5% primary surplus for Greece being unrealistic, yet Eurogroup says 3.5% target is here to stay. Who’s spinning what?

IMF: “...I cannot see us facing this on a primary surplus that is above 1.5 [ percent of GDP]. I know it's just not credible in our view. And you will see that there is nothing in the European statement anymore that says 3.5 should be used for the DSA. So there, too, Europe is moving.” As I just quoted from the eurogroup statement clearly saying 3.5% surplus is staying.

IMF is again tangled up in long tales of courage played against short strides to surrender. PR balancing, face-savings, twisting, turning, obscuring… you name it, the IMF got it going here.



Tuesday, May 24, 2016

23/5/16: Greek Debt Sustainability and IMF's Pipe Dreams


IMF outlined its position on Greek debt sustainability, once again stressing the fact - known to everyone with an ounce of brain left untouched by Eurohopium injections from Brussels and Frankfurt : Greek debt is currently unsustainable.

Here are some details of the IMF’s latest encounter with reality:

Firstly, per IMF: Greek “debt was deemed sustainable, but not with high probability, when the first program was adopted in May 2010. Public debt was projected to surge from 115 percent of GDP to a peak of 150 percent of GDP, primarily because the expected internal devaluation implied declining nominal GDP while fiscal deficits were expected to add to the debt burden, but also because of the decision to forgo a private sector debt restructuring (PSI).”

Several things to note here. The extent of internal devaluation required for Greece is a function of several aspects of Euro area policies, most notably, lack of functional independent currency that can absorb - via normal devaluation - some of the shocks; lack of will on behalf of the EU to restructure official debt owed by Greece to EFSF/ESM pair of European institutions and to the ECB; and effective capture of virtually all Greek ‘assistance’ funds within the banking sector and external financing sector, with zero trickle down from these sectors funding to the real economy. In other words, there were plenty of sources for Greek debt non-sustainability arising from EU construct and policies.

Secondly, “the much deeper-than-expected recession necessitated significant debt relief in 2011-12 to maintain the prospect of restoring sustainability. Private creditors accepted large haircuts;… European partners provided very large NPV relief by extending maturities and reducing and deferring interest payments; and Fund maturities were lengthened…”

Which, of course is rather ironic. Lack of functional mechanisms for the recovery in the Greek case included, in addition to those internal to the Greek economic institutions, also the three factors outlined above. In other words, de facto, 2011-2012 restructuring of debt was, at least in part, compensatory measures for exogenous drivers of the Greek crisis. The EU paid for its own poor institutional set up.

However, as IMF notes, “European partners also pledged to provide additional debt relief—if needed—to meet specific debt-to-GDP targets (of 124 percent by 2020 and well under 110 percent by 2022). Critically for the DSA, the Greek government at the time insisted — supported by its European partners — on preserving the very ambitious targets for growth, the fiscal surplus, and privatization, arguing that there was broad political support for the underlying policies.”

Oh dear, per IMF, therefore (and of course the Fund is correct here), the idiocy of shooting Greece in both feet was of not only European making, but also of Greek making. No kidding: Greek own Governments have insisted (and continue to insist) on internecine, unrealistic and outright stupid targets that even the IMF is feeling nauseous about.

“Serious implementation problems caused a sharp deterioration in sustainability, raising fresh doubts about the realism of policy assumptions, especially from mid–2014. The authorities’ hoped-for broad political support for the program did not materialize…  causing long delays in concluding reviews, with only 5 of 16 originally scheduled reviews eventually completed. The problems mounted from mid-2014, with across-the-board reversals after the change of government in early-2015. Staff’s revised DSA—published in June 2015—suggested that the agreed debt targets for 2020-2022 would be missed by over 30 percent of GDP.”

This is clinical. Pre-conditions for August 2015 Bailout 3.0 were set by a combination of external (EU-driven) and internal (domestic politics-driven) factors that effectively confirmed the absolute absurdity of the whole programme. Yes, the IMF is trying to walk away now from sitting at the very same table where all of this transpired. And yes, the IMF deserves to be placed onto the second tier of blame here. Blame is due nonetheless, as the Fund could have attempted to seriously force the EU hand on changing the programme on a number of occasions, but it continued to support the Greek programme, broadly, even while issuing caveats.

But give a cheer to the Tsipras’ Government utter senility: “Critically, …the new government insisted—like its predecessor—that it could garner political support for the necessary underlying reforms.”


And now onto new stuff.

Per IMF’s today’s note: “developments since last summer suggest that a realignment of critical policy and DSA assumptions can no longer be deferred if the DSA is to remain credible. While there certainly has been progress in some areas under the new program that was put in place in August 2015 with support by the ESM, and growth and primary balance out-turns last year were better than expected, the government has not been able to mobilize political support for the overall pace of reforms that would be required to retain the June 2015 DSA’s still ambitious assumptions of a dramatic, rapid, and sustained improvement in productivity and fiscal performance. In all key policy areas—fiscal, financial sector stability, labor, product and service markets—the authorities’ current policy plans fall well short of what would be required to achieve their ambitious fiscal and growth targets.”

Pardon me here, but I seriously doubt the primary problem is with the Greek Government inability to mobilize political support. Actually, the real problem is that the entire framework is so full of imaginary numbers, that any Government in any state of political leadership will have zero chance at delivering on these projections. Yes, the Greeks are blessed with a Government that would’t be able to replace a battery in a calculator, but now, even with fresh batteries no calculator would be able to solve the required growth equations.

So, we have the IMF conclusion: “Consequently, staff believes that a realignment of assumptions with the evident political and social constraints on the pace and scope of adjustment is needed”. In more common parlance, the IMF has to revise its model assumptions as follows:

Primary surplus (aka - austerity):  The IMF recognizes that current tax rates are already too high in Greece (that’s right, the IMF actually finds Greek tax targets to be self-defeating), while expenditure cuts have been ad hoc, as opposed to structural. Thus, with “…tax compliance rates falling precipitously and discretionary spending already severely compressed, staff believes that the additional adjustment needed to allow Greece to run sustained primary surpluses over the long run can only be achieved if based on measures to broaden the tax base and lowering outlays on wages and pensions, which by now account for as much as 75 percent primary spending… This suggests that it is unrealistic to assume that Greece can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a primary surplus of 3½ percent of GDP.”

This is bad. And it is direct. But IMF wants to make an even stronger point to get through the thick skulls of Greek authorities and their EU masters: “Even if Greece through a heroic effort could temporarily reach a surplus close to 3½ percent of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy
making institutions and projections suggesting that unemployment will remain at double digits for several decades.” ‘Heroic’ efforts - even in theory - are not enough anymore, says the IMF. I would suggest they were never enough. But, hey, let’s not split hairs.

So to make things more ‘realistic’, the IMF estimates that primary surplus long run target should be 1.5 percent of GDP - full half of the previously required. Still, even this lower target is highly uncertain (per IMF) as it will require extraordinary discipline from the current and future Greek governments. Personally, I doubt Greece will be able to run even that surplus target for longer than 5 years before sliding into its ‘normal’ pattern of spending money it doesn’t have.

Growth (aka illusionary holy grail of debt/GDP ratios):  “Staff believes that the continued absence of political support for a strong and broad
acceleration of structural reforms suggests that it is no longer tenable to base the DSA on the assumption that Greece can quickly move from having one of the lowest to having the highest productivity growth rates in the eurozone.”

Reasons for doom? 

  1. “…the bank recapitalization completed in 2015 was not accompanied by an upfront governance overhaul to overcome longstanding problems, including susceptibility to political interference in bank management. …in the absence of more forceful actions by regulators, and in view of the exceptionally large level of NPLs [non-performing loans] and high share of Deferred Tax Assets in bank capital, banks will be burdened by very weak balance sheets for years to come, suggesting that they will be unable to provide credit to the economy on a scale needed to support very ambitious growth targets.” There are several problems with this assessment. One: credit creation is unimaginable in the Greek economy today even if the banks were fully reformed because there is no domestic demand and because absent currency devaluation there is also no external demand. Two: despite a massive (95%+ of all bailout funds) injection into the banking sector, Greek NPLs remain unresolved. In a way, the EU simply wasted all the money without achieving anything real in the Greek case.
  2. lack of structural reforms in the collective dismissals and industrial action frameworks “and the still extremely gradual pace at which Greece envisages to tackle its pervasive restrictions in product and service markets are also not consistent with the very ambitious growth assumptions”.

So, on the net, “against this background, staff has lowered its long-term growth assumption to 1¼ percent… Here as well the revised assumption remains ambitious in as much as it assumes steadfastness in implementing reforms that exceeds the experience to date, such that Greece would converge to the average productivity growth in the euro-zone over the long-term.”


So how bad are the matters, really, when it comes to Greek debt sustainability?

Per IMF: “Under staff’s baseline assumptions, there is a substantial gap between projected
outcomes and the sustainability objectives … The revised projections suggest that debt will be around 174 percent of GDP by 2020, and 167 percent by 2022. …Debt is projected to decline gradually to just under 160 percent by 2030 as the output gap closes, but trends upwards thereafter, reaching around 250 percent of GDP by 2060, as the cost of debt, which rises over time as market financing replaces highly subsidized official sector financing, more than offsets the debt-reducing effects of growth and the primary balance surplus”.

A handy chart to compare current assessment against June 2015 bombshell that almost exploded the Bailout 3.0


As a result of the above revised estimates/assumptions: a “substantial reprofiling of the terms of European loans to Greece is thus required to bring GFN down by around 20 percent of GDP by 2040 and an additional 20 percent by 2060,…based on a combination of three measures..:

  • Maturity extensions: An extension of maturities for EFSF, ESM and GLF loans of, up to 14 years for EFSF loans, 10 years for ESM loans, and 30 years for GLF loans could reduce the GFN and debt ratios by about 7 and 25 percent of GDP by 2060 respectively. However, this measure alone would be insufficient to restore sustainability.
  • …Extending the deferrals on debt service further could help reduce GFN further by 17 percent of GDP by 2040 and 24 percent by 2060, and …could lower debt by 84 percent of GDP by 2060 (This would imply an extension of grace periods on existing debt ranging from 6 years on ESM loans to 17 and 20 years for EFSF and GLF loans, respectively, as well as an extension of the current deferral on interest payments on EFSF loans by a further 17 years together with interest deferrals on ESM and GLF loans by up to 24 years). However, even in this case, GFN would exceed 20 percent by 2050, and debt would be on a rising path.
  • To ensure that debt can remain on a downward path, official interest rates would need to be fixed at low levels for an extended period, not exceeding 1½ percent until 2040. …Adding this measure to the two noted above helps to reduce debt by 53 percent of GDP by 2040 and 151 percent by 2060, and GFN by 22 percent by 2040 and 39 percent by 2060, which satisfies the sustainability objectives noted earlier”.

So, in the nutshell, to achieve - theoretical - sustainability even under rather optimistic assumptions and with unprecedented (to-date) efforts at structural reforms, Greece requires a write-off of some 50% of GDP in net present value terms through 2040. Still, hedging its bets for the next 5 years, the IMF notes: “Even under the proposed debt restructuring scenarios, debt dynamics remain highly sensitive to shocks.”

In other words, per IMF, with proposed debt relief, Greece is probabilistically still screwed.

Which, of course, begs a question: why would the IMF not call for simple two-step approach to Greek debt resolution:

  • Step 1: fix interest on loans at zero percent through 2040 or 2050 (placing bonds with the ECB and mandating the ECB monetizes interest on these bonds payable by EFSF/ESM et al). Annual cost would be issuance of ca EUR 2 billion in currency per annum - nothing that would add to the inflationary pressures in the euro area at any point in time;
  • Step 2: require annual assessment of Greek compliance with reforms programme in exchange for (Step 1).

Ah, yes, I forgot, we have an ‘independent’ ECB… right, then… back to imaginative fiscal acrobatics.

One has to feel for the Greeks: screwed by Europe, screwed by their own governments and politically ‘corrected’ by the IMF. Now, wait, of course, all the upset must be directed toward getting rid of the latter. Because the former two cannot be anything else, but friends…

Friday, April 22, 2016

21/4/16: Drama & Comedy Back: Grexit, Greesis, Whatever


Back in July last year, I wrote in the Irish Independent about the hen 'latest' Greek debt crisis: http://www.independent.ie/opinion/comment/expect-a-harder-default-for-greeks-and-less-democracy-for-the-rest-of-us-31368677.html. Optimistically, I predicted that a full-blown crisis will return to Greece in 2018-2020, based on simple mathematics of debt maturities. I was wrong. We are not yet into a full year of the Greek Bailout 3.0 and things are heading for yet another showdown between the Three-headed Hydra the inept Greek authorities, the delusional Germany, and the Lost in the Woods T-Rex of the IMF.

Predictably, IMF is still sticking to its Summer 2015 arithmetic: Greek debt is simply not adding up to anything close to being sustainable: an example of the rhetoric here. Meanwhile, the FT is piping in with a rather good analysis of the political dancing going on around Greece: here. The latter provides a summary of new dimensions to the crisis:

  1. Brexit
  2. Refugees crisis
But there is a kicker. Greece is now in a primary surplus: latest Eurostat figures put Greek primary balance at +0.7% GDP for 2015, well above -0.25% target. And Greek Government debt actually declined from EUR320.51 billion in 2013 to EUR319.72 billion in 2014 and EUR311.45 billion in 2015. This can and will be interpreted in Berlin as a sign of 'improved' fiscal performance, attributable to the Bailout 3.0 'reforms' and 'assistance'. The argument here will be that Greece is on the mend and there is no need for any debt relief as the result.

Still, official Government deficit shot from 3.6% of GDP in 2014 to 7.2% in 2015. Annual rate of inflation over the last 6 months has averaged just under -0.1 percent, signalling continued deterioration in economic conditions. Severe deprivation rate for Greek population rose to the crisis period high in 2015 of 22.2 percent, up on 21.5 percent in 2014. Industrial production on a monthly basis posted negative rates of growth in January and February 2016, with February rate of contraction at -4.4% signalling a disaster state, corresponding to 3% drop on the same period 2015. Volume of retail sales fell 2.2% y/y in January marking fourth annual rate of contraction in the last 5 months. Unemployment was 24% in December 2015 (the latest month for which data is available), which is down from 25.9% for December 2014, but the decline is more likely than not attributable to simple attrition of the unemployed from the register, rather than any substantial improvement in employment.

In simple terms, Greece remains a disaster zone, with few signs of any serious recovery around. And with that, the IMF will have to continue insisting on tangible debt relief from non-IMF funders of the Bailout 3.0.

It is a mess. Which probably explains why normally rather good Washington Post had to resort to a bizarre, incoherent, Trumpaesque coverage of the subject. This, https://www.washingtonpost.com/news/wonk/wp/2016/04/20/the-crazy-reason-we-might-be-facing-a-huge-crisis-in-greece-again/, in the nutshell, sums up American's disinterested engagement with Europe. 

Enjoy. Grexit is back for a new season to the screens near you. And so is Greesis - that unique blend of fire and ice that has occupied our newsflows for 6 years now with high drama and some comedy.


Friday, August 14, 2015

14/8/15: IMF on Two Unfinished Bits of Greek Bailout 3.0


IMF's Ms. Christine Lagarde statement on Greece:


Key points are:

1) Per Lagarde, “of critical importance for Greece’s ability to return to a sustainable fiscal and growth path", "the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail." In other words, the path to Eurogroup's 3.5% long term primary surplus target on which everything (repeat - everything) as far as fiscal targets go, hinges is not yet specified in full. The Holy Grail is not in sight, yet...

2) "…I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical …that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far." In simple terms, for all the lingo pouring out of the Eurogroup tonight, Greece has not been fixed, its debt remains unsustainable for now and the IMF - which ESM Regling said tonight will be expected to chip into the Bailout 3.0 later this autumn - is still unsatisfied with the programme.

"Significant debt relief" - off the table so far per Eurogroup - is still IMF's default setting.

Monday, July 20, 2015

20/7/15: Greece clears IMF arrears. Almost broke, again.


Having borrowed EUR7.2bn, Greece promptly settled its arrears with the IMF (EUR1.996 billion at exchange rates of June-July, but closer to EUR2.05bn in current rates), opening up the way to pay on maturing EUR3.492 billion ECB and NCBs funds today.


Have a new credit card? Will travel… for now… but only for now, as with today's payments we have less than EUR2 billion credit line remaining available for the country.

Next stop: see here http://graphics.wsj.com/greece-debt-timeline/.

Meanwhile, banks reopening - overhyped on both sides (by the mainstream media as a non-event (re: no mayhem) and by alternative media as a run-waiting-to-happen (re: mayhem)) - came relatively calmly, as banks remain under severe capital controls, limiting withdrawals to EUR420 per person per week. On top of which, checks are cashed only into bank account (no cash); withdrawals abroad and money transfers abroad are not allowed, even on pre-paid cards; limits placed on use of credit and debit cards abroad; no new savings or deposits accounts can be opened; repayments of loans can only be done in line with scheduled payments (no advanced repayments possible except by using cash or transfers from abroad); only unrestricted payments are for tax purposes, social security or bank liabilities payments, plus payments to hospitals and for education.

Any wonder there were no bank runs today? Ah, sure, who would run on an open bank with no cash in it? A taxman?..

But coming back to those bridge finance funds. The EU is now saying the Bailout 3.0 will take 6-8 weeks to agree and structure. There is EUR3.188 billion worth of ECB maturities coming up in 5 weeks, EUR1.344 billion of IMF loans due in September, and EUR3.8 billion worth of short term bonds maturing before 8 weeks runs out. Which begs a question: where will Greece get the money to cover these liabilities?

Tuesday, July 14, 2015

14/7/15: Arrears on IMF & No Samurai Bonds Trigger: Greek Bridge Financing Update


Yesterday, I covered the possible routes to structuring bridge financing for Greece (see this post with today's earlier update). Via WSJ, here is the list of debts coming due over July-August, inclusive of two payments to IMF that are now in arrears (see IMF statement below):

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

And the IMF statement from last night:

A point to note: Greece redeemed the Samurai bonds (Yen 20bn) yesterday. Which, effectively, means it avoided private sector bonds default trigger.

Monday, July 13, 2015

13/7/15: Sit Back and Watch That Eurogroup Unanimity Evaporate


Following the marathon meetings (14 hours-long Eurogroup followed by 17 hours-long Euro Council) the Greek 'deal' was heralded in the media and the markets as some sort of the Great Revelation - a solution to fix all prior non-solutions, a final fixing of the Greek economy and the end to all the endless bailouts of the past.

Of course, cynics noted that solving debt overhang (already officially recognised by the IMF as unsustainable) by issuing more debt may not be a good idea… but cynics are here to be ignored by the Euro optimists who define their own reality.

But never mind all the 'long run' stuff. Five hours into a 'unanimous' Eurogroup decision on Greece, there is neither much of a unanimity, nor much of a decision left.

Eurogroup agreed, amongst other things, that:

  • Greece will be - in principle - granted new funding of some EUR82-86 billion. The future is preliminary and will have to be finalised to fully reflect the economic conditions deterioration since January, as well as other factors. In addition to fiscal funding, these money will also be used to recapitalize Greek banks (current running estimate is for EUR10-25 billion in recaps, but the actual amount will not be known until there is a full and 'comprehensive' assessment of the banks books (to be carried out in September-December 2015).
  • While nothing is certain about this 'longer term' EUR82-86 billion package, there are immediate needs for funds that Greece has to meet. With today's missed IMF repayment, there's EUR4.934 billion due in the rest of July. There's EUR1.544 billion overdue from June. And there's EUR4.188 billion due in August. Total of EUR6.477 billion is due to the ECB alone. There is no expectation that the 'long term' package will be ready before much of this comes due, so Greece will clearly need a 'bridge financing' arrangement. There is an added 'complication': before ECB can be paid (a default on ECB will trigger a cascade of cross-defaults and a closing of the banks' oxygen line, the ELA), the IMF arrears have to be cleared in full. 


The 'bridge financing' should be a walk in the park, right? After all, there is a unanimous agreement to set new funding for the longer term, and a part of this is the recognition that before such an agreement is struck, there is a unanimous (one assumes) agreement that Greece needs to be helped through the intermediate period.

Unanimity bit

Today, there was a shorter Eurogroup meeting to sort that little bit of 'unanimity' out. And the conclusion was: err… no unanimity and:

  1. A new delay in sorting out longer-term financing (from today's morning expectation of 2 weeks to more realistic 4 weeks); and
  2. There is no agreement on bridge financing. Worse, per Dijsselbloem: "We looked at the issue of bridge financing because there are urgent needs and this process of finalising an agreement will take time… This is very complex, we looked at a number of possibilities, but there are technical, legal, financial and political issues to consider, so we have tasked an ad-hoc working group of technical experts to look into that".

Finland's Fin Min Alexander Stubb said that "Greek Bridge Financing Still an Open Question. I foresee those negotiations being very difficult because I don't see many countries having a mandate to give money without any conditions." Oops… as they say in Helsinki. Slovakia's Government has stated they oppose any lending to Greece, including both bridge and long term financing. Austria, Estonia, The Netherlands and a number of other countries will need to approve every move via their parliaments. All three been pretty sceptical on 'bridge financing' from July 6th on. Slovenia is set against the bridge funding too.

And then there's Germany - which is, for now, sitting pretty quiet on the topic, but don;t expect an easy push over from Merkel - Schäuble duo. After all, the latter has managed to square off with Mario Draghi on the topic of ECB operations in a nasty exchange yesterday.


Beyond the unanimity bit... logistics

Beyond the unanimity bit, there's a technicality or logistics of structuring the deal… bridge financing is hard to construct, given the Byzantine (actually far worse, by now) European institutions.

There are basically two possible options.

Option 1: Using EFSM bailout fund to loan money to Greece. The option is easier, as it does not require unanimity, but can be passed on the basis of QMV. The fund, however, does not have enough money to finance July-August liabilities due on the Greek side. Reportedly, the EFSM only has EUR11.5 billion available (although some reports put the figure at EUR13.2 billion). And EFSM is no longer an active lender, since it is superseded by another fund, the ESM. Even when the EFSM was operative, it was limited to co-funding bailouts with IMF involvement. IMF is not a party to any bridging loans arrangements, and indeed is not a party to the entire Bailout 3.0 package agreed 'in principal' this am. Added complication: EFSM can be activated by a qualified majority, but a QMV of EU28, not euro area alone. Back in 2011, Britain voted against the use of the EFSM to bail out Greece for a second time.

Option 2: Greece funding itself via issuance of T-bills, selling these to the banks with the banks using ECB ELA to finance these purchases. Which carries two problems with it. One, ECB is yet to hike ELA. Two, T-bills are short term bonds and Greece is constantly rolling over substantial quantity of them in the markets. Issuing more will clearly impair Greek Government ability to secure short term funding. And it will also likely trigger serious discontent within euro area 'core' states - the hawks that 'guard' ECB's prohibition on 'monetary financing'.

Option 3: A combination of Option 2 and bilateral loans. The problems, in addition to Option 2 is that some countries (Finland and Slovakia - explicitly, Germany and the Netherlands, for now implicitly) have ruled out participating in the scheme. Which makes such lending a tough sell for other member states. Italy stated already that it will only supply bilateral loans if all other euro area states do so.

Option 4: Using SMP profits accumulated at the ECB and in the national central banks from Greek bonds coupon payments to lend to Greece from ECB to repay ECB and IMF loans. Problem here is that 2014 profits still retained amount to EUR1.9 billion, while 2015 profits yet to be paid amount to 1.4 billion. Clearly not enough to close the gap.


Update 14/7/2015: FT blog on the Eurogroup technical paper outlining options for Greek bridge financing is here: http://www.ft.com/intl/fastft/359551


Thursday, June 4, 2015

4/6/15: Greece is Not Zimbabwe... but It Is Groovying with Zambia


So Greece opted to bundle its repayment to the IMF due June 5th into final one-shot payment due 'before' June 30th, raising total to be paid on June 30th to EUR1.5 billion. Before then, Greece faces public sector wages and state pensions bill of ca EUR1.5 billion, and EUR5.2 billion of maturing short-term debt.

The IMF official statement is here:
"The statement below is attributable to IMF Communications Department Director and Chief Spokesman Gerry Rice:

“The Greek authorities have informed the Fund today that they plan to bundle the country’s four June payments into one, which is now due on June 30.

“Under an Executive Board decision adopted in the late 1970s, country members can ask to bundle together multiple principal payments falling due in a calendar month (payments of interest cannot be included in the bundle). The decision was intended to address the administrative difficulty of making multiple payments in a short period. “"

As IMF notes, the 1970s decision (see below) is designed to deal with 'administrative' issues. In Greek case, the delay is linked to the ongoing battle between Greece and the Institutions [formerly known as Troika] over the new 'bailout' package. Which hardly fist 'administrative' label in any way.

IMF 1970s decision is cited here:
 Source: @jsphctrl 

Only payments for one calendar month can be bundled and interest due must be paid outside the bundling arrangement.

So far, in history of IMF, only Zambia availed of this arrangement in the 1980s. At least - a consolation prize for Europe - it was not Zimbabwe.

Another (close enough) case, but with more sinister outrun was Argentina, back in 2003-2004: "Last September, Argentina temporarily defaulted on a $2.9 billion payment due to the IMF until the new Standby Arrangement was hammered out. This March, the Argentines threatened to withhold payment of a $3.1 billion payment unless the IMF staff recommended completion of the second review of the loan accord." Source here. [h/t for this to @drubaid].

WSJ already updated their debt maturity timeline for Greece to reflect the 'bundling': http://graphics.wsj.com/greece-debt-timeline/

With OMT, LTROs, TLTROs, ELA, SMP, PSI, OSI, capital controls, SDR (IMF) reserves manipulation and now 'bundled' payments, Greeks are getting more and more inventive at creative sovereign finance...

Congratulations, Euro, the 'very soft default' has arrived...

Tuesday, May 5, 2015

5/5/15: IMF, Greece & Europe: More Bickering, Less Tinkering?


An interesting article on Greece in FT: http://www.ft.com/intl/cms/s/0/72b8d2ae-f275-11e4-b914-00144feab7de.html#ixzz3ZFOAlR4B suggesting that the IMF is now actively drifting into fall-out management mode for Greek crisis.

According to the FT: "Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors." And this means that Greece is at a risk of failing to secure release of EUR3.6 billion worth of bailout funds - the IMF share of the EUR7.2 billion of Troika funds - that still remain to be disbursed to Athens.

Absent these funds, Greece is insolvent, full stop.

Basically, per IMF projections, debt sustainability in Greece requires 3% primary net lending / borrowing balance in 2015 (up on estimated surplus of 1.5% in 2014) and this is required to rise to 4.5% in 2016-2017 and 4.24% in 2018-2020. In Euro terms, 2015 primary surplus required is EUR5.49 billion. Instead, the IMF now estimates that the country will be running a primary budget deficit (not surplus) of 1.5%.

Primary balance is Government balance excluding interest on debt.

If true, the deterioration in Greek finances so far this year is massive. And there is no way of correcting for it, unless either Greece imposes much more severe austerity or there is a formal and significant debt restructuring for debts held by the 'official sector' - aka Troika.

Per FT report, sources close to the Eurogroup claimed that “The IMF thinks the gap between the two realities is very large right now,” said one senior official involved in the talks. A stand-off between the IMF and eurozone creditors over Greece is not unprecedented. Three years ago, the IMF refused to disburse its portion of the aid tranche because of similar fears Greek debt was not falling fast enough. The IMF only signed off after eurozone ministers agreed to consider, but never implemented, writing down their bailout loans to reduce Greece’s debt to “substantially lower” than 110 per cent of GDP by 2022. It currently stands at 176 per cent." So in other words, the IMF appears to be pushing for a debt restructuring for Greece.

In a separate report: http://www.ifre.com/imf-not-insisting-on-further-debt-relief-for-greece-schaeuble/21197177.fullarticle Germany Finance Minister Wolfgang Schaeuble denied the IMF is pressuring the Eurogroup to restructure Greek debts.

As I noted in January (http://trueeconomics.blogspot.ie/2015/01/512015-imf-on-debt-relief-for-greece.html), this is by far the most often repeated disagreement between Greece, Europe and the IMF. And it comes as the Eurogroup attempts to structure another bailout package for Greece. So far, rumours have it, the Eurogroup outlook for Bailout 3.0 needs are pitched at EUR30-50 billion. But, as FT notes, "rising deficits could change that calculation."

Meanwhile, Greece continues to stumble from one payout to next - on a weekly basis - http://trueeconomics.blogspot.ie/2015/05/1515-good-news-may-hide-bad-news-when.html

And now we have a smell of napalm in the morning - some signs of bond markets repricing peripheral risks for the euro area:



Monday, April 6, 2015

Wednesday, August 15, 2012

15/8/2012: Total Insolvency in Greece Meets Total Denial in Europe


And so as predicted here back in February, Greece is now in a complete meltdown when it comes to fiscal targets (report here). The only thing that is keeping this Euro charade still rolling is seemingly endless willingness of the European 'leaders' to deny the reality of Greek complete and total insolvency.