22/5/17: Eurogroup and Greece: Wrestling Defeat from the Claws of Victory

Today's Eurogroup meeting on Greece ended in no agreement and extends the current tranche negotiations into June 15, the date of the next Eurogroup meeting.

For the background:

• Greece is an economy brought to its knees by the Eurogroup and the ESM, as detailed in a range of facts well-summed up here: http://blogs.lse.ac.uk/eurocrisispress/2017/05/01/greece-any-better-times-or-more-pitfalls-ahead/; and
• Greece is now back in a recession, with dire consequences for both, the economy and the Greek society, and for fiscal targets and programs previously agreed by the Eurogroup: http://trueeconomics.blogspot.com/2017/05/18717-greece-in-recession-again.html.

The key sticking point so far is the scheduling of future primary surpluses (budgetary surplus before the debt servicing costs are factored in). The Eurogroup insists on these surpluses running at 3.5% of Greek GDP for the first 5 years following 2018, declining to 2% or 2.2% (depending on the version of the draft agreement) for 2023-2060. 

In very simple terms, such commitments are absolutely bogus (and dangerous). They are bogus because there is absolutely no way anyone can project growth rates out to 2060 from today that can be in any way reasonably accurate to predict primary surpluses. They are dangerous, because they will shackle Greek governments to running buffer funds to compensate for possible recessionary and non-cyclical shocks to the primary surpluses. These buffers will imply underinvestment within the Greek economy (public investment) over the long term. Which, of course, will damage the Greek economy and increase the risk of non-compliance with the deficit rules.

Here is how unrealistic the current proposed targets are. Consider, first, IMF projections (April 2017 data) for primary surpluses over the next 5 years (2018-2022). Remember, Greek target (grey line) is 3.5% for that period:

With exception of Italy, no other advanced euro area economy comes even close to the proposed target. And no one is making a case that Italy running these surpluses is somehow consistent with structurally strong growth expectations over the period.

Now, consider past and present performance, based on 10 years windows. For 10 years window, Greek target surplus is 2.85% per annum:

The view is a bit brighter. 

In the 1990s, two countries managed to run surpluses at or above the target set for Greece forward: Belgium and Ireland. Both countries were recovering from substantial fiscal crises of the late 1980s-early 1990s.  But, unlike Greece today, both countries benefited from exogenous shocks that boosted significantly their surpluses and growth: Belgium gained substantial income transfers from growth of the EU institutions, and Ireland gained from a large scale FDI boom. Neither country needed to run large scale public investment programmes financed from own (internally-generated) funds. 

In the 2000s, Belgium continued to run large surpluses and it was joined in this by Finland. Belgium surpluses drivers remained the same, while Finland carried out substantial fiscal consolidation in the wake of the early 1990s crisis timed perfectly to coincide with rapid economic growth in the economy. 

In simple terms, no advanced euro area economy has managed to run surpluses expected of Greece at the times of adverse economic growth conditions or immediately after a major recession.

As I noted in the earlier post on the Greek economy (see http://trueeconomics.blogspot.com/2017/05/18717-greece-in-recession-again.html), the state of Greek economy has been so highly uncertain over the last few years, that any projections 3-4 years out from today are simply an example of a delirious wish-for-thinking. In this environment, setting targets out to 2060 is absurd, and dangerous, for it commits Greece to targets that may or may not be to the benefit of the Greek economy and sets up the euro area fiscal policy architecture for a failure at the altar of extreme conviction in technocratic targeting. 

27/1/17: Eurogroup has ignored Brexit risks to Ireland

My article for the Sunday Business Post on the latest Eurogroup meeting:  https://www.businesspost.ie/opinion/constantin-gurdgiev-eurogroup-ignored-brexit-risks-irish-economy-376645.

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.

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... 

11/5/16: 7+1 Steps Guide to Greek Crisis Madness

Greece is back in the news recently with yet another round of crisis talks and measures. Here's where we stand on the matter.

After another Eurogroup 'talks' this week, Greek Government is back to drawing up a new set of 'measures' to be presented to the Parliament. These 'measures' are, once again, needed for yet another Eurogroup agreement of yet more loans to the country.

The madness of this recurring annual spectacle that the EU, the Greeks and the IMF have been going through is so apparent and so predictable by now, that anywhere outside Greece itself it is simply banal.

The scenario is developing exactly along the same lines as before:

1. Greeks are running out money
2. Greek loans funds are not being remitted by the EU because of the 'lack of progress on 'reforms' which were never progressed since the Bailouts 1.0 & 2.0.
3. Greek Government insists that no more 'reforms' can be imposed onto the Greek economy because there is already no economy left due to previously imposed 'reforms'
4. IMF threatens to walk out and European authorities become 'doubtful' of Greek commitments to 'reforms'
5. European authorities and Greece get into a room to hammer our (3) as a precondition for (2) both of which are necessary to avoid Greek default and are thus required to prevent (4).
6. Greece agrees to more 'reforms', gets more loans, none of which have anything to do with actually supporting Greek economy
7. Greek government declares another 'victory' on the road of the country 'exit from an era of creditors', whilst creditors become ever more committed to Greece.
8. Within 6 months, (1) repeats anew...

And this is exactly what has been happening over the recent days.

Government partner Panos Kammenos has already heralded “Greece’s exit from an era of creditors" this week in the wake of the promises by Greece to implement new round of 'reforms' aimed at placating the EU and the IMF into providing fresh credit to Greece. The target date for Greek Government putting its tail between its legs for the umpteenth time is May 24th when the Eurogroup is supposed to meet to decide on the next round of debt financing for Greece.
What are the latest 'reforms' about?

1. New privatization fund (because previous one did nada, zilch, nothing) to sell state assets (with hugely inflated expected valuations) to investors (read vultures) to generate funds (that will fall grossly short of) required to pay some debt down.
2. New rules for working out non-performing bank loans (foreclosure & bankruptcy reforms) because under (1) above, vultures, sorry 'investors', ain't getting enough.  
3. Load of new taxes (levying coffee, fuel and even web connections, for a modern economy cannot exists in the vacuum of knowledge taxes).
4. Automatic cuts to fiscal spending should the Government breach targets on fiscal deficits assigned under 2015 'deal'.
5. EUR5.4 billion in fresh budget cuts.

In return, Tsipras is getting Eurogroup's usual waffle.

The IMF (that actually holds more central position between the Greek and the EU corners) will probably be allowed to excuse itself from underwriting Bailout 3.0 agreed last Summer. This will load full Greek bailout cost onto the EU institutions - something that Europe is happy to do because the IMF has become a realist thorn in the hopium filled buttocks of European 'policymaking'. IMF will, of course, rubber stamp the Bailout 3.0 programme by remaining an 'advisory' institution (sort of like Irish Fiscal Council - bark, but no bite). In exchange, it will get European funds to repay IMF loans and will walk away from the saga with bruises, but no broken nose. Rumour has it, Germany will accept this role for the IMF but only if Greece agrees to become Europe's holding tank for refugees (it's an equivalent of Turkey Compromise with Athens that will make Erdogan livid with jealousy).

Tsipras will also receive another promise from the EU to examine Greek debt relief. By now, everyone forgot that the EU already promised to do so four years ago (see last page, 2nd paragraph in Eurogroup statement from November 27, 2012 and reiterated it in August 11, 2015 Bailout3.0 agreement). Thus, Tsipras will be able to put a new 'certificate of a promise' (written in French or German or both, for better effect) onto his cabinet wall, while being fully aware that a promise from the EU is about as good as a used car salesman's assurances about a vehicle's transmission. The only chance any sort of relief will be forthcoming is if the IMF amplifies its rhetoric about Greek debt 'sustainability', which may happen at the next G7 meeting next week, or may not happen for another six months... who knows?

Meanwhile, the saga rolls on. Protests in Greece - 'Everyone'sOutraged', are greeted by the markets as 'Things Are Going Swimmingly' just as IMF's team is shouting 'The Patient's Dead, You Morons!' while Germans are saying first 'Nothing's Happening' and a week later changing their minds to 'Things Are so Good, We'll Have a Deal' to the solo of a Greek official singing 'We've Been Half Dozing' and a chorus of EU leaders erupting with a jubilatory 'Lalala'.

Remember: we are in Europe! Mind the gap... with reality.

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.

17/7/15: Eurogroup tightens screws on Greece: Bridge v MoU

Eurogroup statement on Greece (h/t @FGoria):

Key:

• Bridge finance via EFSM (as rumoured, so no surprise here);
• Bridge finance security cushion via SMP profits being moved to an escrow account (unexpected) clearly to ensure Denmark's and UK agreement to use EFSM. Bad news: SMP profits should be rebated back to Greece to alleviate debt burden, not 'securitised' to increase debt burden;
• Good bit - SMP profits are to be returned to Greece unless used as EFSM bridge loan cushion. So at some point in time, Greeks will get these funds to, presumably, cover a part of bridge finance funding;
• The bit "...he risks of not concluding swiftly the negotiations with the ESM remain fully with Greece" (emphasis mine). This amounts to setting pressure very high on Greek Government to basically accept MoU conditions unaltered, as presented to them and, thus, makes the very idea of 'negotiations' a farce. Given that EFSM cover (bridge) is only for July, at most for first week of August, this statement basically puts Greece on notice: either agree immediately to ESM (Bailout 3.0) conditions or face a loss of SMP funds on top of everything else.

In effect, Eurogroup is driving home the tactical advantages gained by over-extending Bridge loan negotiations into the last minute and from Tsipras' total surrender at July 12-13 meetings. Greece has no where to go, but to ESM at this stage, so my suspicion is that MoU will be tougher than Bailout in Principle position of July 12-13.

14/7/15: IMF Update on Greek Debt Sustainability

Predictably... following yet another leak... the IMF has been forced to publish its update to the 'preliminary' Greek debt sustainability note from early July. Here it is in its full glory or, rather, ugliness: http://www.imf.org/external/pubs/ft/scr/2015/cr15186.pdf?hootPostID=2cd94f17236d717acd9949448d794045.

As discussed in my earlier post here: http://trueeconomics.blogspot.ie/2015/07/14715-brave-new-world-of-imf-debt.html, Greek debt to GDP ratio is now expected to "The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program."

Which means that "Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far."

Under the current programme (running from November 2012 through March 2016) the IMF projected "debt of 124 percent of GDP by 2020 and “substantially below” 110 percent of GDP by 2022", specifically, the projected debt at 2022 was 105%. Now, the Fund estimates 2022 debt at 142% of GDP.

Furthermore, "Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective."

Worse, on the current path "Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term."

And IMF pours cold water over its own dream-a-little target of 3.5% primary surpluses for Greece. "Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so." Note the word decades! Now, IMF rejoins Planet Reality raising "doubts about the assumption that such targets can be sustained for prolonged periods."

In short - as I said earlier, politics not economics drive Eurogroup decision making on Greece. The IMF is now facing a stark choice: either engage with the euro area leadership in structuring writedowns (potentially also extending maturities of its own loans to Greece) or walk away from the Troika set up (and still extend maturities on its own loans to Greece).

Little compassion for the Fund, though - they made this bed themselves. Now's time to sleep in it...

14/7/15: The Brave New World of IMF Debt Sustainability Analysis

According to the secret IMF report released to the European leaders prior to the Sunday-Monday summits, "The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date - and what has been proposed by the ESM."

This is reported by Reuters here.

Per IMF report,that completes the Debt Sustainability Analysis released earlier this month (see the link to the original published report here) and that already concluded that Greek debts were not sustainable, accounting for the effects of capital controls and other recent factors, to address sustainability of Greek debt into 2020s:

1. The EU (euro area) will need to extend graced period on Greek debt repayments to the ECB and the euro area to 30 years from now, and (not or)
2. Dramatically extend maturity of debt given to Greece under previous programmes and the new upcoming programme.

Barring the above - which are not in the proposed Bailout 3.0 package - the euro area member states will have to "make explicit annual fiscal transfers to the Greek budget or accept "deep upfront haircuts" on their loans to Athens". In other words - either there will have to be direct aid or direct up front write downs to the debt. These too are not in the current proposal for Bailout 3.0.

Despite this damning analysis, the IMF continues to insist that it will be a part of the new arrangement and will have a new agreement with Greece comes March 2016 when the current one ends. In other words, political arm of the IMF (aka Madame Lagarde and national representatives of the EU) are now directly, head-on, and forcefully in a contradiction to their own technical team assessment of the situation. Madame Lagarde was present at the Sunday-Monday meetings and produced no apparent progress on the what her own technical team says will be a necessary part of any sustainable solution to the crisis.

There is an added component to all of this: IMF analysis refers to a significant deterioration in banking sector situation in Greece since the introduction of capital controls. Which makes sense - there are no new deposits coming into the system and, one can easily assume, loans due are not being serviced. This, in turn, begs a question as to how realistic are the EU-own assessments that the Greek banks will require EUR12-25 billion in capital.

How dire is the situation with Greek debt?

IMF new report projects debt to GDP ratio peaking at above 200% - which is bang on with my estimates previously - up on the previous IMF estimate of peak at 177%. By 2022, IMF estimated Greek debt will decline to 142% of GDP (that is back from the previous 'secret' report linked above). Now, the Fund says debt will stay at 170% of GDP even by 2022.

As Retuers reports, "Gross financing needs would rise to above the 15 percent of GDP threshold deemed safe and continue rising in the long term".

"In the laconic technocratic language of IMF officialdom, the report noted that few countries had ever managed to sustain for several decades the primary budget surplus of 3.5 percent of GDP expected of Greece." In other words, the holly grail of massive and continuous long-term primary surpluses - the sole pillar underpinning previous positive assessments of the Greek debt sustainability by the IMF - is now gone. Realism prevails - no country can sustain such surpluses indefinitely. Surprisingly, IMF continues to insist on 3.5% primary surpluses target.

As a reminder, IMF has called for official sector debt write downs for Greece in the past. It still insists on the same (per technical team), but does nothing from the political leadership point of view.

Conclusion: IMF is now fully torn between its political wing - dominated by the EU representation and leadership - and its technical side. Unlike a unified and functional World Bank (led by the US), the IMF has fallen into the European orbit of dysfunctional politicking and funding programmes that are far from consistent with IMF-own standards. (To see some evidence of this, read this excellent essay from Bruegel). 

IMF's role in the Greek bailout 3.0 will go down in history as a direct participation in the wilful re-writing of the European system of governance to embrace politicised leadership over calm and effective economic policy structuring. As per Eurogroup, there is no longer any doubt that the euro area leadership is wilfully incapable of resolving the Greek crisis. Incompetence no longer counts - the euro area finance ministers and prime ministers had all necessary information to arrive at the only logical conclusion: debt writedowns are needed and are needed upfront. They opted to ignore these so politics can prevail over economics and finance, allowing for subsequent consolidation of the euro area systems and institutions without a clear path for any member state to deviate from such.

Greece is just the first roadkill on this path.


Update: WSJ covers the topic of IMF dilemma.

13/7/15: A Promise of a Deal = An Actual Surrender

So we finally have a 'historic' agreement on Greece. You know the details:

1. Tsipras surrendered on everything, except one thing.
2. One thing Tsipras 'won' is that the assets fund (to hold Greek Government assets in an escrow for Institutions to claim in case of default) will be based in Greece (as opposed to Luxembourg), managed still by Troika (it remains to be seen under which law).
3. IMF is in and is expected to have a new agreement with Greece past March 2016 when the current one runs out. So not a lollipop for Tsipras to bring home.
4. All conditionalities are front-loaded to precede the bailout funding and Wednesday deadline for passing these into law is confirmed. 

Bloomberg summed it up perfectly in this headline: EU Demands Complete Capitulation From Tsipras.

Remember,  Tsipras went into the last round of negotiations with the following demands:

Source: @Tom_Nuttall

And that was after he surrendered on Vat, Islands, pensions, corporation tax - all red line items for him during the referendum.

Reality of the outcome turned out to be actually worse. 

The new 'deal' involves a large quantum of debt (EUR86 billion, well in excess of Greek Government request from the ESM) and the banks bailout funding requirement has just been hiked from EUR10-25 billion to 'up to EUR50 billion', presumably to allow for some reductions in ELA. 

The new 'deal' only promises to examine debt sustainability issue. There are no writedowns, although Angela Merkel did mention that the plan does not rule out possible maturities extensions and repayment grace period extensions. This, simply, is unlikely to be enough.

The 'deal' still requires approval of the national parliaments. Which can be tricky. Here is the table of ESM capital subscriptions by funding nation:

Tsipras also lost on all fronts when it comes to privatisations. In fact, even if the future Government lags on these, the EU can now effectively cease control over the assets in the fund and sell these / monetise to the fund itself. Not sure as per modalities of this, but...

Detailed privatisation targets are to be re-set. Let's hope they will be somewhat more realistic (home hardly justified in the context of the new 'deal'):

To achieve this, EU had to literally blackmail Tsipras by rumour and demands:

Source: @TheStalwart

Source: @Frances_Coppola

And so the road to the can kicking (not even resolution) is still arduous:

 Source: @katie_martin_fxs

My view: the crisis has not gone away for three reasons:

1. Short-term, we are likely to see new elections in Greece prior to the end of 2015;
2. We are also likely to see more disagreements between the euro states and Greece on modalities of the programme; and
3. Crucially, over the medium term, the new 'deal' is simply not addressing the key problem - debt sustainability. 

For the fifth year in a row, EU opts for kicking the same can down the same road. 

8/7/15: Latest Round of Greece Talks: Smoke, Fire, Grexit

Summit / Eurogroup takeaways:

1. No progress of any variety beyond the usual agreement to have more talks
2. Short term deal 'weighing in' for Sunday is rumoured - effectively a bridge loan based on Greek acceptance of pre-referendum proposals. One of proposals involved a 3-4 months long bridge financing deal (Bailout 2.1) followed by 3-4 year deal (Bailout 3.0). This was rejected by Finland.
3. Any 'possible' new deal being discussed is 2-3 years in duration - a can kicking of weak variety, in other words.
4. No haircuts on debt will be allowed.
5. Sunday - full EU heads summit (not euro alone), which indicates something serious brewing - at least in terms of applying pressure on Tsipras. Also, possible Grexit push. Summit can be 'avoided' if Greece presents an acceptable plan on Thursday. Decision to be finalised on Saturday.
6. Overall, Bailout 3.0 package of measures is now being pushed out to tougher conditionality for Greece than in previous talks.
7. Juncker stated that the EU Commission has prepared a detailed Grexit plan, inclusive of humanitarian aid. Juncker plan also includes balance of payments support scheme for non-euro states with big exposures to Greek banks: Bulgaria, Romania. Big questions are also about Macedonia and Serbia.
8. At least in theory (detailed theory per Juncker) we have the end of 'irreversibility' of the euro (for now - at single state level).
9. IMF is back in the Troika 'Institutions' pairing.
10. No parallel currency discussions - left to Finance Ministers discussions.

My take: Overall, Greek position is now nearly toast. Contrary to many expectations, a No vote did not produce a stronger playing hand for Greece. Possibly because Tsipras failed to deliver any new proposals. Sunday EU Council would be required for a treaty change. This implies two possibilities: haircuts (ruled out) or Grexit. We are leaning toward Grexit, heavily.

The acceleration in Eurogroup and council demands on Greece suggests that prior to the Referendum there was already a strong consensus that Grexit is the preferred direction for further talks.


Serious sidelines:

Italy position is optimistic on the deal, but no debt relief in sight. Still remains hard-line on Greece.

Merkel takes harder stance than anyone else: strikes down bridge agreement: "Bridge financing didn't play any role in our talks tonight." Stance on conditions: "The proposals we are expecting now encompass what we put forward for second programme plus more for third programme." Haircuts: "A haircut is not up for debate. That is a bailout under the treaties and that will not happen." Merkel isn't even keen on discussing ESM programme resumption. Tougher thing still: "The situation has become much worse. I have to take 3rd programme proposals to Bundestag - hence need detail." Which means serious hurdles to cover here.

France is the lead in Greek side support and Hollande is not impressed: "It is true that if there were no agreement, the situation would be serious. Other options would have to be sought."

Spain's Rajoy "New Greek programme will have conditions attached. Will have to be approved by institutions, then Eurogroup, then leaders". Meaningless, surprisingly.

Donald Tusk: "Our inability to find an agreement may lead to the insolvency of Greece and the bankruptcy of its banking system". Says the Greek government is to present its proposals by Thursday, July 9. Juncker put deadline at 8:30 am Friday, July 10. So lots of confusion.

Finland: ruled out Bailout 3.0 for Greece on any terms.

Belgium: Finance Minister Van Overtveldt: "very disappointed" by today's Eurogroup meeting. New Greek Finance Minister made "very good explanation" of situation, but "had no new proposals to show us". "I had the strong impression that everybody really feels the sense of urgency, except the Greek government." His boss: Belgian PM Michel: has “more and more difficulty to understand the logic of Tsipras. On the one hand he says 'we want to stay in the eurozone'. On the other hand, he's not taking any initiative, zero, nothing, to stay in the eurozone.”

Lastly - a link worth reading: http://www.capx.co/the-eurocrats-are-punishing-greece-to-scare-other-countries/

27/2/15: Of a momentary surrender and a longer fight: Greece v Eurogroup

Couple more earlier comments on Greek situation for print edition of Expresso, 31.12.2015 pages 8-9 and online http://expresso.sapo.pt/os-trabalhos-herculeos-de-varoufakis-mercados-financeiros-a-espera-da-lista-de-reformas=f911931, February 22, 2015.


English version of some of the comments:


# In which points did Greek delegation change its position?

Last night Eurogroup saw significant changes to the Greek Government position vis-a-vis the current bailout. Firstly, the Government has now abandoned its elections promises to achieve a debt write down and end the agreement with the Troika. Instead, the old agreement has been extended until the end of June on the basis of Greece committing to full implementation of the original Master Financial Assistance Facility Agreement (MFAFA) and, thus, Memorandum of Understanding (MOU). The dreaded austerity programme remains in place, despite the Greek Government claims to the contrary. The dreaded Troika is still there, now referenced as Institutions. Secondly, Greece failed to secure control over banks recapitalisation funding. A major point of Government plans was to use of some of these funds for the purpose of funding public investment and/or debt redemptions. This is no longer an option under the new bridging Agreement. Thirdly, the Greek Government failed to secure any concessions on the future programme. The Eurogropup conceded to allow the Greece to present its proposals for the future pos-MOU agreement, but any proposals will have to be with the parameters established by the current programme.


# In which points Germany change its hard position?

So far, Germany and the Eurogroup conceded nothing to the Greek Government. The much-discussed references in the Eurogroup statement that allow for some flexibility on fiscal targets, principally recognition of the economic conditions in computing the target primary surplus for 2015, is not a new concession. Under the MOU, present conditions were always a part of analysis performed to establish deficit targets and the current programme always allowed for some flexibility in targets application. Crucially, Greece went into the negotiations with two objectives in sight: reduction in the debt burden and reduction in the austerity burden. The fist objective was abandoned even before last night's Eurogroup meeting. The second objective was severely diluted when it comes to the Eurogroup statement and the bridging programme. There are no concessions relating to the future (post-June 2015) programme. In a sense, Germany won. Greece lost.


# What do you expect for the list of reforms to be presented on Monday?

We can expect the Greek Government to further moderate its position before Monday. The new set of proposals is likely to contain request for delays (not abandonment, as was planned before) of privatisations, a request for the primary deficit target for 2015 to be lowered to around 2-2.5% of GDP, and a request to allow for some of the past austerity measures to be frozen, rather than reversed, for the duration of 2015. The Greek Government is likely to present new short term growth strategy based on a promise to enforce more rigorously taxation, set higher tax rates on higher earners, in exchange for using the resulting estimated 'savings' to fund public spending and jobs programme. The final agreement on these will likely be in the form of a temporary programme, covering 2015, and possible extension of this programme will be conditional on 2015 debt and deficit dynamics. Beyond Monday, however, a much more arduous task will be to develop a new programme. In very simple terms, Greece still requires a debt restructuring to cancel a significant quantum of current debt. This now appears to be off the table completely. As the result, any new agreement achieved before June 2015 will be inadequate in terms of restoring Greek economy to any sustainable growth path. Both Greece and Europe, today, are at exactly the same junction as two weeks ago: an insolvent economy is faced with the lenders unwilling to recognise the basics of financial realities.  

27/2/15: Running out of cash: Greece heading into March

My comments to Portuguese Expresso on Greek agreement:

http://leitor.expresso.pt/#library/expressodiario/26-02-2015/caderno-1/temas-principais/divida-portuguesa-com-juros-em-minimos-mas-grecia-arrisca-se-a-entrar-em-incumprimento-em-marco

Unedited version here:

"Over the next four months, Greece is facing significant debt redemption pressures. In March, EUR5.83 billion of T-bills and IMF loans maturing and requiring a re-financing. Between now and the end of April, Greece will require to roll over EUR8.1 billion of T-bills and refinance EUR2 billion worth of IMF loans.

Currently, Greece has no money to cover its debt maturity redemptions in March and it is quite questionable if the country can find cash, outside the Programme extension facilities agreed last week but are yet to be ratified by the Eurogroup members and the Institutions, to do so in the markets. Currently Greek 10 year bonds are priced at 65.354, with a yield of 9.23% and rising. This suggests there is unlikely to be significant appetite in the markets to cover a substantial issue of new debt by Greece. At the same time, internal reserves available to the Government are virtually non-existent, especially given the rate of tax receipts deterioration in recent months. December 2014 tax revenues were 14 percent below target, January 2015 tax revenues fell 20% below target, implying a monthly shortfall close to EUR1 billion. In all likelihood, shortfall was at least as big in February as the new Government was tied up in negotiations with the Troika and deposits fled from the banks.

The key problem is that Greece has no option when it comes to delaying repayment of the above funds. IMF is the super-senior lender of last resort and T-bills markets are the bloodline for the Greek Government. Failing to redeem maturing T-bills will be a disaster for the country. In short, Syriza urgently needs to secure new funds to cover these redemptions."

22/2/15: Ifo on Eurogroup Conclusions

Ifo's Hans-Werner Sinn on Eurogroup deal for Greece:

I failed to spot where the Eurogroup allows for any 'additional cash' for Greece. 

The core point that Greece "has to become cheaper to regain competitiveness. This can only happen if Greece exits the Eurozone and devalues the drachma." On this, Sinn is probably correct. Unless, of course, there is a large scale writedown of Greek debts accompanied by a massive round of reforms. Both of these conditions will be required and not one of them is on the cards.

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.

Why?

• 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: http://www.consilium.europa.eu/en/press/press-releases/2015/02/150220-eurogroup-statement-greece/). 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 http://www.zerohedge.com/news/2015-02-20/why-4-and-not-6-months)

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

21/11/2012: Brave Face of the Eurogroup is not enough

Headlines from yesterday's eurogroup summit hitting this morning wires are far from encouraging:


Dutch finance minister Dijsselbloem says Greece may cost extra money
Says: Not in a hurry on Greece.
20 Nov 2012 - Economic commentary -
09:12 EU's Van Rompuy is to present a new EU budget proposal at start of summit
09:03 Greece PM Samaras and EU's Juncker are to meet in Brussels tomorrow
09:00 German Chancellor Merkel tells lawmakers Greece's financing hole through 2016 can be filled with combination of lower rates and increased EFSF according to a source
08:42 According to Schäuble, eurogroup finance ministers and the IMF could not agree how to fill the €14bn shortfall in Athens' finances over the next two years. There was also disagreement on whether Greece had to achieve debt sustainability by 2020 or 2022.
08:26 German finance minister tells lawmakers ECB believes Greece can raise EUR 9bln through T-bill issues according to a source
08:19 German finance minister tells lawmakers it is still open question whether 2020 or 2022 is benchmark for Greek debt sustainability according to a source
... and so on.

It means that the EU is once again finding itself lacking any real means for dealing with the Greek crisis. Here's the summary of what solutions have been floated and why none of them are dealing with the problem at hand:

- Greek haircuts/writedowns (see my note on these here: http://trueeconomics.blogspot.ie/2012/11/15112012-impossibility-of-greek-2020.html) are for now off the table. This is the major problem with the summit. As I explained in my earlier note, Greek crisis cannot be resolved without a major writedown of the Greek debt held by the EFSF and the ECB. 'Major' here references 25% writedown on EFSF and 75% writedown on ECB. Even these levels of writedowns will not bring Greece to 120% debt/GDP limit in 2020.

- The Fin Mins more open to extending Greek debt maturity structure, including doubling these from 15 to 30 years. Assuming this action was interest rate neutral, the resulting reduction in debt financing burden will be minor, and will be offset by the two factors: (1) extending maturity will not make debt levels any lower at any point in time to 2020-2022, so it is hard to see how this measure can have anything but a marginal improvement effect on debt target sustainability for Greece; and (2) extending maturity will make debt profile flatter in period post-2020 or post-2022 depending on which target date you take. In other words, saving a little today will mean longer debt overhang and higher debt levels in the future. Lastly, extending maturity profile will only increase probability of Greek Governments in the future reneging on their budgetary commitments - the longer the enforcement period, the more likely the enforcement will come against future recessionary pressures (we are not abolishing business cycles to 2040 are we?) and/or changes in political outlook.

- The Fin Mins are luke warm to the idea of interest rate reductions on Greek debt held by the EFSF. Currently, Greece is charged ca 3.5% on the EFSF funds it borrows. Cutting these by a half can yield savings of around 3-3.2% of GDP at the peak point for debt. Given current projections, by 2020 these savings can be running at an annual rate of 2.4% of GDP. These are significant - enough to fund current paydowns on the debt that would be consistent with the status quo scenario of dropping Greek debt from  ca 180% of GDP to 144% of GDP by 2022. But these will not be enough to cover debt reductions repayments required to drive it down to 120% of GDP.

So here we are: the euro zone's Greek 'can' is now a full oil drum filled with cement and the road is sloping uphill. Good luck kicking…

Now, go back to the drawing board: In the Greek case, OSI is not only unavoidable, it actually might not be enough, if carried via ECB-held debt alone. Which has some seriously grave implications for EFSF and thus to the ESM.

These implications are:

1) Greek restructuring of EFSF-held debts and/or alteration to maturity duration of Greek borrowings from EFSF will mean changes in the ESM profile as well or changes in the ESM position as the ultimate crisis resolution mechanism. For example, if EFSF funds carry maturity of 30 years, ESM either becomes secondary (non-structural) vehicle with lower maturities or it alters its funding maturity to match EFSF. Furthermore, any Greek deal will have to be open to Ireland, Portugal and Cyprus, and potentially to Spain and even Italy.

Now, let me remind you that EFSF/ESM set up is structural to the entire EU response to the crisis (not only Greek case). That's a hefty hurdle to jump: rescue Greece and risk weakening ESM?

2) Lowering interest rates charged on greek debt by official holders - although in itself still a form of restructuring - presents some added risks not mentioned above. Suppose we half Greek current costs of funding to 1.8% or so. Currently, EFSF can borrow at around 1%. But that borrowing rate is not guaranteed. To fund longer maturity for Greece, EFSF/ESM will either have to borrow longer (in which case cost of funding rises) or will have to carry maturity mismatch risk (in which case expected future cost of funding rises). Add to that the fact that current low interest rate environment is most likely abnormal. With these considerations, expected future cost of funding 1.8% loans to Greece might run into negative margin scenario, where ESM funding costs will exceed Greek interest rates.

Worse, one can easily make an argument that ESM funding costs are endogenous to Greek funding costs and to absence of OSI risk. Hence, if Greek situation (and 'no OSI' conditions) deteriorates, ESM cost of funding can rise too.

So far, after yet another eurogroup meeting, we are still where we were - on the road to a spectacular Greek risks unraveling...

25/9/2012: Some questions on foot of latest ESM statement

From today's Joint Statement of the Ministers of Finance of Germany, the Netherlands and Finland (link here):
"Specifically, we discussed the governance, independence, decision making and accountability of the new Single Supervisory Mechanism involving the ECB. The new framework has to ensure that the ECB can continue to conduct effectively and independently its current tasks, and it has to take into account the concerns of non euro area Member States regarding governance of the new supervision. This requires appropriate governance structures and a clear division of responsibilities between a new ECB Supervisory Council, which may include representatives from all Members States, and the Governing Council of the ECB. To ensure the accountability of the new Supervisory Council, it should report on the stability situation and its decisions to European Finance Ministers (Ecofin Council or Eurogroup ) as well as provide reports to the European Parliament and national Parliaments."

Key points in my view are:

• Core problem is the coordination of regulatory systems for euro area banks and non euro area banks is now further fractionalized into the space of 'supervised Euro area banks', 'non-supervised Euro area banks' (assuming the new Single Supervisory Mechanism (SSM) applies only to systemically important banks), 'non-Euro area banks in countries under mechanism', 'non-Euro area banks outside mechanism but inside the mechanism-covered countries', 'non-Euro area banks in countries outside the mechanism'.
• The role of the Supervisory Council vis-a-vis the Governing Council of the ECB
• The extent and nature of reporting by the Supervisory Council as well as the extent of the Ecofin / Eurogroup and EU Parliament oversight (if any) over the Supervisory Council activities.

"Regarding longer term issues, we discussed basic principles for enabling direct ESM bank recapitalisation, which can only take place once the single supervisory mechanism is established and its effectiveness has been determined. Principles that should be incorporated in design of the instrument for direct recapitalization include: 
1) direct recapitalisation decisions need to be taken by a regular decision of the ESM to be accompanied with a MoU; 
2) the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities; 
3) the recapitalisation should always occur using estimated real economic values; 
4) direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM."

Points of note here are:

• ESM recapitalization of the banks can only take place after the SSM is both established and proven in its effectiveness. Time scale for this? Anyone's guess. While time scale for Spanish economic meltdown is pretty well in front of our eyes.
• Full and formal MoU will be required - a political no-go territory for some countries, though in fact the EU can fudge this requirement by simply re-printing as an MoU already ongoing 'reforms' processes.
• Legacy assets should remain under the responsibility of national authorities, which means there is no coverage under the ESM for crisis-related assets. One can interpret this, possibly, as a de facto no to any removal of the Irish banks assets off the hands of the Irish state. One can also read this as a potential for restructuring some of the Irish Government liabilities relating to banks, but only to the extent of altering the cost of funding these liabilities (e.g. ESM loan with no change in actual liability risk, so that Irish banks-related debts will remain Irish Government liability).
• Point (3) implies no 'future economic value' in computing ESM-available funding. In other words, losses incurred will not be covered. Which opens the question - who will cover the losses?
• Point (4) is clear with respect to equity holders (these take the hit first, then the state owned equity is wiped out, only after that - ESM), but what about lenders to the banks (private bondholders and official lenders, including ECB)?

17/6/2012: Stability & Greek elections

Quote of the week:

Pamela McCourt: "Stability in language is synonymous with rigor mortis. - Ernest Weekley, lexicographer". To EU & its 'national' elites: watch what you wish for, for it just might happen.

And in light of the Greek elections results, 'stability' in the euro area is, indeed, a form of rigor mortis. Need proof? Here's the EU statement on the Greek elections results, quoted in full [emphasis mine]:

"The Eurogroup takes note of the provisional results of the Greek elections on 17th June, which should allow for the formation of a government that will carry the support of the electorate to bring Greece back on a path of sustainable growth.

The Eurogroup acknowledges the considerable efforts already made by the Greek citizens and is convinced that continued fiscal and structural reforms are Greece’s best guarantee to overcome the current economic and social challenges and for a more prosperous future of Greece in the euro area.

The Eurogroup reiterates its commitment to assist Greece in its adjustment effort in order to address the many challenges the economy is facing.

The Eurogroup therefore looks forward to the swift formation of a new Greek government that will take ownership of the adjustment programme to which Greece and the Eurogroup earlier this year committed themselves.

The Eurogroup expects the Troika institutions to return to Athens as soon as a new government is in place to exchange views with the new government on the way forward and prepare the first review under the second adjustment programme."

So you have to be a bit of an optimist to read any of the above as a commitment by the Eurogroup to any sort of change in the Greek bailout terms. And absent significant and rapid changes in the programme, there is not a snowballs' chance in Hell that Greece is going to satisfy these conditions in the medium term. Stability of status quo reaffirmed in the Greek elections results is, in fact, the death warrant to the yet-to-be formed Greek Government.