15/7/15: Is it Trust or Fiscal Performance? Greece v Excessive Deficit Procedures

As noted in the previous post, that Trustless Greece apparently is a better example of European policies of internal devaluation at work than the best-in-class Ireland. At least by metric of competitiveness.

But what about Fiscal Trust? After all, there is a unifying metric for that one - the European Commission own Excessive Deficit Procedure. And here is a handy table from EU Commission own presentation on the topic:

Yes, yes... a little help. Since 1997 (that is across the Celtic Tiger era boom too), Ireland was on the penalty bench with EU in relation to breaking fiscal rules for 11 years. Greece - also 11 years. One has zero Trust in its EU account. The other has Fort Knox worth of that 'hard' EU currency...

Either the Rule is dodgy or something's fishy in the arithmetic...

15/7/15: Is it Trust or Competitiveness? Greece v Unit Labour Costs

Remember hard currency of Europe - no not the euro - Trust? And remember how Greeks lack that currency because of failed reforms and incomplete adjustments?

Here's a nice chart from the EU Commission itself showing changes in economic competitiveness (the EU fetishised) metric of Unit Labour Costs.

In this, untrustworthy Greece is more competitive in 2013-2015 than the best-in-class Ireland. 

So if the internal devaluations work their magic, as the EU seems to believe, then by this metric, Greece should have been a roaring success story... with a surplus of Trust to spare some for Ireland.

Then, again, the EU won't notice other factors at play in determining GDP growth. The idiosyncratic ones, like, say, corporate tax inversions and 'knowledge development boxes' or (whispering) taxation double-sandwiches for lunch... Because everything is about Trust in Europe...

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.

14/7/15: Ifo Sinn: Euro Agreement Doesn’t Really Help Greece

Ifo's Hans Werner Sinn on Monday Eurogroup and Euro Council agreements:

You can sense his frustration.

I can add that much of what is said above makes sense, although I do not think temporary Grexit is feasible. A normal, EU-facilitated Grexit with no timing terms attached is.

14/7/2015: And the Greek Debt Merry-Go-Round Spins & Spins...

In the latest world of EUlunacy, we have some interesting 'developments' on the Greek crisis front.

First up, this: per Irish Finance Minister Noonan, 'Greesolution' agreed Monday am will have 'no budgetary implications' for Ireland, although Ireland 'will be taking on new liabilities'.

Translated into Human language this means: no official increase in Government deficit, but new debt will be issued by Ireland to fund Greek bailout.

Using ESM key, our share of EUR86 billion bailout will be ca EUR1.41 billion. It might be slightly less or slightly more, depending on a range of factors.

But the point is simple: pre-Monday agreement, Ireland had two choices:

Choice 1: support Greek debt write downs. Which would have cost us the same EUR1.41 billion at most, but would have achieved a reduction in Greek debt. Alternatively, if it was structured via monetary financing (ECB-monetised write down) it could have cost us (and rest of EU) virtually nothing (the cost would have been carried out via ECB simply writing down its own assets and liabilities - a balance sheet exercise).

Choice 2: current agreement-envisioned new loans for Greece - which will require all euro area states chipping in to fund the bailout and thus will require Ireland borrowing funds in the markets, increasing our debt, and giving them as loans (more debt) to the already over-indebted Greece.

Minister Noonan et al opted for Choice 2 but claim there will be no cost to Ireland from doing so (presumably because assuming more debt is costless to the Minister). You judge…

Meanwhile, the FT published this handy graphic explaining where the money borrowed by Ireland et al and given as debt to Greece will be used:

Source: FT

• EUR29.7 billion of cash to be loaned to Greece will go to pay down the money borrowed by Greece under the privies EU lending schemes so that a merry-go-round of European policymaking can spin and spin. 
• EUR25 billion will go to the banks to cover damages done by previous merry-go-round schemes. 
• EUR17.2 billion will pay interest on past and current merry-go-round schemes. 
• EUR7.7 billion will go to the banks to cover potential runs by depositors scared of the merry-go-round schemes. 

In total, all but miserly EUR7 billion of new loans to Greece will go one way or the other to sustain unsustainable old loans.

My brain aches from European leaders' insistence on staying oblivious to the reality, my heart ache for European people forced to sustain this oblivion.

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.

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

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. 

13/7/15: IMF's Russian Economy Forecasts 2015-2016

IMF WEO update covered, briefly, changes to the Fund outlook for the Russian economy. Here's a summary:

Overall, the only point here is the delayed upgrade to Russian forecast for 2015-2016. Lower rate of contraction forecast for 2015 (from -3.833% in April WEO to -3.4% this time around) and return to (basically zero) growth in 2016 (+0.2% forecast in july compared to -1.096% in April).

In its briefing on the WEO update, IMF said (emphasis mine): "The other country where the numbers are very bad is in Russia. We now forecast Russia’s growth to be negative at -3.4 percent. It’s a bit better than the forecast in April. That comes from a small improvement in commodity prices and a small increase in confidence, but that’s clearly a very large negative number that will lead to a very tough year in Russia."

Additional risk factor, noted by the IMF, is rates reversion in the U.S. and closing on the rate reversion cycle re-start in the euro area: "...this is going to be the year in which the interest rate in the U.S. is going to start increasing. The date by which the interest rate is expected to increase in Europe will also get closer, and so you are going to see tighter financial conditions, which means that capital will tend to go back to where the rates are attractive. So far, it hasn’t been happening on a very large scale. I think we can expect some capital outflows from a number of these countries, and these always create some problems but they can handle, but that is a challenge they are going to have to face."

Just how bad the effect of rates reversion will be is hard to tell. Overall, however, Russian economy has suffered quite significantly from both, the adverse changes in the global credit flows (away from emerging markets in general) and idiosyncratic drivers pushing credit supply lower. Here are two charts covering the latest BIS data we have:

Overall credit:

Credit to non-financial private sector:

And sources of funding:

Source for charts above: http://www.imf.org/external/np/pp/eng/2015/062915.pdf

13/7/15: About That Europe's Recovery Party

Last week, IMF published its WEO update for July. Little to go by in the general 'news' terms, but a telling sign of just how well repaired the world economy is becoming.

First, off the top, IMF dropped its forecast for global growth for 2015 from 3.5% in April 2015 to 3.3% in July. 2016 outlook remains unchanged at 3.8%. Given IMF estimates 2013-2014 growth at 3.4% each year, this means that 2015 is now expected to be sub-average for the three years period - hardly a sign of an improvement.

When considered by broader regions, Advanced Economies drove deterioration in the outlook. 2015 growth in advanced economies is now projected to be around 2.1%, down on 2.4% projection back in April. 2016 outlook is unchanged at 2.4%. Meanwhile, Emerging Markets and Developing Economies growth forecast has deteriorated from 4.3% in 2015 projected back in April, to 4.2% in July update. 2016 outlook remains the same at 4.7% projected growth rate.

IMF lauded the return to growth in the Euro area, which is supposedly booming - forecast to expand at 1.5% in 2015 (July outlook), same as in April outlook. And the Fund produced a doozer of an uplift to 2016 forecast growth - from 1.6% expected back in April to 1.7% expected in July update. Meanwhile, the U.S. economy got severely downgraded to 2.5% forecast expansion for 2015 (against 3.1% forecast back in April) and to 3.0% expansion forecast for 2016 (against 3.1% forecast back in April).

You can't make this up: the return to growth in Europe is still full-blown 40 percent lower growth than in wobbling U.S. Just in case you wondered: over 2013-2015, according to the latest forecast from the Fund,

• U.S. economy will expand, cumulatively, by 5.39%
• Euro area economy will grow by 1.91%
• Japan will grow by 2.31%
• UK will expand by 7.16%, and
• Other Advanced Economies group will grow by 7.90%.

Yes, that's right - Euro area will under-perform Japan, the heroes of 'blanket QE bombing' of the economy. 

12/7/15: Instead of Abating, Greek Crisis Just Accelerated

Per latest reports, Eurogroup estimates Greek funding needs at EUR82-86 billion - a far cry from EUR53.5 billion requested from ESM. EUR10-25 billion needed for banking sector (because bailing out European states must always involve bailing out banks).

In order to continue funding discussions, Greece is required to pass the following 12 measures before Wednesday:

Source: @eurocrat 

The list is at best - silly:

• Measures 1-3, and 6 are effectively MOU for a bailout, but without an actual bailout commitments;
• Measures 4,  7-9, and 11 require significant time to properly draft, let alone implement;
• Measure 12 is senile - no one has ejected Institutions from Athens (they don't require a visa to travel there);
• Measures 5 and 10 are pro-forma.

Can anyone seriously expect any Government addressing the issues of banks recapitalisation and recovery, plus the issue of non-performing loans within a span of 3 days?

Besides all of this, the key point is that the 12 measures outlined effectively fully and comprehensively pushes Greece into worse adjustments package than anything put forward prior to the Greek referendum. And all this achieves is... brings Greece back comes Wednesday to face more negotiations over additional measures. 

Below are the four pages of key document from the Eurogroup

Source: @giopank

Alternative link to same: http://www.real.gr/DefaultArthro.aspx?page=arthro&id=432281&catID=22

Items that were not agreed upon are in the brackets. These include: nominal debt haircuts.

There is also a proposed escrow 'company' to hold EUR50 billion of Greek assets as collateral (titles to state properties) in Luxembourg (which is neither enforceable, nor serious). 

In simple terms, Greek choice is now stark and simple: accept complete control over the economy and assets from Brussels/Frankfurt or 'temporary' Grexit for 5 years with possible haircuts to debt. Germany et al just accelerated the crisis... next move: Greece.