Friday, February 20, 2015

20/2/15: Troika 3 : Greece 1. Rematch on Monday.

Eurogroup agreement on Greece 'achieved' tonight is a classic can kicking exercise in which Eurogroup and the Troika have won, Greece lost, but no one has moved an inch in real actionable terms.


  • This is not an agreement to end the current programme that Greece is in, nor an agreement on a new programme to replace the current one. Instead, this is an agreement on the methodology for future negotiations over the replacement agreement. The current Master Financial Assistance Facility Agreement (MFAFA) is extended by four months. Hence, the current 'austerity programme' is still in place and has not been replaced by anything new. The extension is to allow time for developing a new agreement to bridge the current programme. This does not guarantee any of the conditions of the new agreement (e.g. 'easing of austerity' or 'reducing debt burden' or anything whatsoever) that will have to follow the current programme after June.
  • Over the next two months (at the longest) here will be a review of the current programme and Greek Government proposals for amending the programme. The review will be conducted "on the basis of the conditions in the current arrangement" (see full agreement here: So no deviations from the 'basis of the conditions in the current' agreement will be allowed even in the review stage, although they might be allowed in the future agreement.
  • However, the agreement also states that this review will make "best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions." In other words, the new agreement will still be required to run within the parameters allowed by the current agreement. You can read this as 'Greece has won recognition from the Eurogroup that current austerity programme needs revision'. Or you can equally read it as: within current austerity programme, there can be some flexibility, like for example, delaying austerity today, but loading more austerity risk into the future, should current delay fail to produce substantial improvement in underlying conditions.
To sum up the above: the old austerity (MOU and MFAFA) are now extended by 4 months. In exchange, Greece gets a promise that the Eurogroup and the institutions (aka Troika) will take a look at its proposals, as long as these proposals adhere to the basis of the current austerity MOU.

  • Greece originally requested a 6-month extension, which would have allowed it to cover redemptions of some EUR6.7 billion worth of ECB bonds maturing in July and August, using the funds from the existent programme. They failed - the agreement extends current access to funds until June and puts Greece on the hook negotiating new bailout while staring into the double barrel of massive debt redemptions coming up. (see

To sum up: Greece will be back to square one, but in a weaker financial position in June, unless it really plays ball before the end of the current extension. This is a major win for the Eurogroup.

  • Greece committed to complete the current bailout. Worse, if it does not follow on through with the planned austerity, Greece will not receive the last tranche of funds. "Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup." So Troika is still there today as it was there yesterday and the Greeks have failed to end the current bailout. If you are inclined to say Eurogroup is not Troika, good luck: today's Eurogroup included IMF, ECB and ESM chiefs. And the Eurogroup clearly stated: "we welcome the commitment by the Greek authorities to work in close agreement with European and international institutions and partners. Against this background we recall the independence of the European Central Bank. We also agreed that the IMF would continue to play its role." So both ECB and IMF are in place and Troika has simply been renamed into Institutions. 

To sum up: Troika is here, still. 

  • On top of that, the Greeks have lost control of bank recapitalisation funds. "In view of the assessment of the institutions the Eurogroup agrees that the funds, so far available in the HFSF buffer, should be held by the EFSF, free of third party rights for the duration of the MFFA extension. The funds continue to be available for the duration of the MFFA extension and can only be used for bank recapitalisation and resolution costs. They will only be released on request by the ECB/SSM." Until now, these funds were to be handled by the Hellenic Financial Stabilisation Fund (HFSF). These funds were also targeted by the Greek Government for use outside bank recapitalisations. Both are now lost positions for Greece: the funds move to EFSF, Greek Government has no say on their disbursement and they can only be used for banks recaps. 

To sum up: Greeks did not gain control over banks recapitalisation funds and did not gain access to these funds for the purpose of easing austerity.

  • In return for the above concessions, Greece got a very wooly commitment from the Eurogroup that the New Troika "will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account". In other words, the primary surplus required for 2015 can (and probably will) be adjusted down. The problem, of course, is that this is only for 2015 and not beyond and that it is of a magnitude that will make absolutely no difference to Greece - we are talking about something of the order of 1-2 percent of GDP in just one year. 
  • Reminder, Greek debt to GDP stands at around 175%. No amount of tinkering on the margins will deliver sustainability of this debt and no amount of tinkering on the margins can deliver a buffer of defense from the risk of future increase in the cost of funding the Greek debt.

To sum up: Presenting a primary deficit adjustment as a victory for the Greeks is equivalent to prescribing a course of homeopathy for the stroke patient.

Key point of the whole agreement is that it entails nothing in terms of what follows after the current bailout is completed. This - in all its principles and details - remains subject to future agreement, outside the scope of this Eurogroup meeting. In other words, Greece bought itself time to bargain about the future, Eurogroup bought itself time to get Greeks into even less comfortable financial position. And the Troika is still there.

In words of Wolfgang Schäuble: “The Greeks certainly will have a difficult time to explain the deal to their voters. As long as the programme isn’t successfully completed, there will be no payout."

In words of the Agreement: "The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely."

In words of the WSJ: "Greece’s ...government backed down from its plans to throw out the bailout program..., striking a tenuous deal with the rest of the eurozone to extend the program by four months."

In words of FT: "The decision to request an extension of the current programme is a significant U-turn for Alexis Tsipras, …who had promised in his election campaign to kill the existing bailout. …it includes no reduction of Greece’s sovereign debt levels, another campaign promise. Discussions on debt restructuring are likely as part of follow-on talks ahead of another bailout programme, which must now be agreed before June…Critically, the agreement commits Athens to the “successful completion” of the current bailout review, although it allows for Greece to negotiate its economic reform agenda."

Troika 3 : Greece 1

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