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."

26/1/15: Markets v Greece: Too Cool for School... for now

There is much talk about the impact (or rather lack thereof) of Greek elections on the markets.

In fact, the euro continued to price in the effects of a much larger factor - the QE announcement by the ECB, the stock markets did the same. Only bonds and CDS markets reacted to the Greek elections, and even here the re-pricing of Greek risks was moderate so far (see chart below and the day summary for CDS - both courtesy of CMA).

The reason for this reaction is two-fold.

Firstly, Greece is a small blip on the overall radar map of Euro area's problems. Even in terms of Government debt. Here is the summary of the Government debt overhang levels (over and above 60% of debt/GDP benchmark) across the Euro area:

In simple terms, real problems for the euro, in terms of risk pricing, are in Italy, France and Spain.

Secondly, Greece is a political risk, not a financial risk to the Euro area. And it is a risk in so far, only, as yesterday's election increases the probability of a Grexit. But increasing probability of a Grexit does not mean that this increase is worth re-pricing. It is only worth worrying about if (1) increase in probability is significant enough, and (2) if elections changed the timing of the possible event, bringing it closer to today compared to previous markets expectations.

Now, here is the problem: neither (1) nor (2) have been materially changed by the Syriza victory last night. My comments to two publications yesterday and today, summarised below, explain.


Greek elections came as a watershed for both the markets analysts and the European elites, both of which expected a much weaker majority for the Syriza-led so-called 'extreme left' coalition. The final outcome of yesterday's vote, however, is far from certain, and this has been now fully realised by the markets participants.

The confrontation with the EU, ECB and the IMF, promised by Zyriza, is but one part of the dimension of the policy course that Greece will take from here on. Another part, less talked about today in the wake of the vote is accommodation.

Let me explain first why accommodation is a necessary condition for both sides in the conflict to proceed.

Greece is systemically important to the euro area, despite all claims by various European politicians to the contrary. Greece is carrying a huge burden of debt, accumulated, in part due to its own profligacy, in part due to the botched crisis resolution measures developed and deployed by the EU. It's debt is no longer held by the German, French and Italian banks, so much is true. German and French banks held some EUR27 billion worth of Greek Government debt at the end of 2010. This has now been reduced to less than EUR100 million. There is no direct contagion route from Greek official default to the euro area banking sector worth talking about. But Greek private sector debts still amount to roughly EUR10 billion in German and French banking systems (with more than EUR8 billion of this in German banks alone). Greek default will trigger defaults on these debts too, blowing pretty sizeable hole in the euro area banks.

However, lion's share of Greek public debt is now held in various European institutions. As the result, German taxpayers are on the hook for countless tens of billions in Greek liabilities via the likes of the EFSF and Eurosystem.

And then there is the reputational costs: letting Greece slip out into a default and out of the euro area will mark the beginning of an end for the euro, especially if, post-Grexit, Greece proves to be a success.

In short, one side of the equation - the Troika - has all the incentives to deal with Syriza.

One the other side, we can expect the fighting rhetoric of Syriza to be moderated as well. The reason for this is also simple: the EU-IMF-ECB Troika contains the Lender of Desperate Resort (the ECB) and the Lender of Last Resort (the IMF). Beyond these two, there is no funding available to Greece and Syriza elections promises make it painfully clear that it cannot entertain the possibility of a sharp exit from the euro, because such an exit would require the Government to run a full-blown budgetary surplus, not just a primary surplus. For anyone offering an end to austerity, this is a no-go territory.

So we can expect Syriza to present, in its first round of talks with the Troika, some proposals on dealing with the Greek debt overhang (currently this stands at around EUR 210 billion in excess debt over the 60% debt/GDP limit), backed by a list of reforms that the Syriza government can put forward in return for EU concessions on debt.

These reforms are the critical point to any future negotiations with the EU and the IMF. If Syriza can offer the EU deep institutional reforms, especially in the areas so far failed by the previous Government: improving the efficiency and accountability of the Greek public services, robust weeding out of political and financial corruption, and developing a functional system of tax collections, we are likely to see EU counter-offers on debt, including debt restructuring.

So far, Syriza has promised to respect the IMF loans and conditions. But its rhetoric about the end of Troika surveillance is not helping this cause of keeping the IMF calm - IMF too, like the ECB and the EU Commission, requires monitoring and surveillance of its programme countries. Syriza also promised to balance the budget, while simultaneously alleviating the negative effects of austerity. In simple, brutally financial terms, these sets of objectives are mutually exclusive.

With contradictory objectives in place, perhaps the only certainty coming on foot of the latest Greek elections is that political risks in Greece and the euro area have amplified once again and are unlikely to abate any time soon. Expect the Greek Crisis 4.0 to be rolling in any time in the next 6 months.

So in the nutshell, don't expect much of fireworks now - we all know two deadlines faced by Greece over the next month:

• The IMF review, to start as soon as the new Government is in place;
• February Euro Group meeting (tomorrow one will not be of much substance) with Greek bailout expiring February 28th, although the EU is already signaling, less than 24 hours after Greek election, willingness to extend maturity of the programme (http://uk.reuters.com/article/2015/01/26/uk-greece-election-eu-idUKKBN0KZ0ZB20150126)

These are the markers for the markets to worry about and these are the timings that will start revealing to us more information about Syriza policy stance too. Until then, ride the wave of QE and sip that kool-aid lads... too cool to worry about that history lesson, for now...