Greece: A Possible Deal, a Bumpy Road Ahead

Published on June 23, 2015

Representatives from the Institutions and from Greece are currently working night and day in Brussels to hammer out the details of an agreement that would guarantee an extension of the current bailout and the disbursement of much needed funds to Athens.

*** There is now a certain level of optimism that a deal could be sealed in the next few days, Thursday, or perhaps Friday. This would trigger the “ratification process” that will have to take place first in the Greek Parliament (Saturday or Sunday) and then – among others – in the German Bundestag, which is likely to be called into extraordinary session early next week. ***

*** The last true points of contention are the discount VAT regime for restaurants, which the Greek government has pledged to defend, and a possible statement on future debt re-profiling by the Institutions, which is considered critical for Greek Prime Minister Alexis Tsipras to allow for a smooth passage of the measures. ***

*** Greece is likely to receive, if and when a deal is sealed, part of the cash already “earmarked” for the country – money transferred back by the HFSF, 1.9 billion Euros in SMP profits (plus 1.2 billion further profits that will mature in July, see SGH 6/3/15, “Greece: Rocky Roadmap to a Deal”) – but none of the 7.2 still in the Institutions’ coffers, for which “a successful completion of the current program is needed.” ***

*** A positive vote by the Greek Parliament seems likely at this point, but it remains to be seen how many of the majority MPs will refuse to hold the party line. Help will definitely come from other factions, allegedly without strings attached, but a strong internal opposition would be a signal for Tsipras that the implementation measures of the deal will be perhaps impossible to approve further down the road. ***

State of Play in Brussels

Senior EU officials have been cautiously optimistic and signaled that a staff level agreement could be finalized by Thursday or Friday, but the negotiating teams have been working around the clock to resolve the final points of contention.

A deal to extend the current bailout has to be ratified before next Tuesday, June 30, as it is the official expiration date for the current bailout. Indeed, the Greek government has pointed out that it is able to pay the IMF on that day, and that it will do so provided there is an agreement in place with the Institutions.

The latest measures proposed by Athens seem to be more concrete in terms of numbers, especially on the contentious issue of pensions funding, but on the VAT buckets there is still enormous political resistance by the Greeks, we hear, to change the current regime. Ironically, VAT reform is essential for the Institutions as well.

From what we understand, more in general, cuts only constitute 7% of the proposed measures, while the remaining 93% is tax increases, which is not necessarily the greatest recipe for growth. But the EU is prepared to close an eye on this as long as the numbers are credible, and with the French now enthusiastically pushing for a deal, it will be of little importance how Athens actually gets there.

Dissipating Fears of Capital Controls

Together with the extension – in itself a positive for Greece – Athens should obtain access to some of the money that has been previously earmarked – namely the 10.9 billion returned in February by the HFSF (Hellenic Financial Stability Fund) to the EFSF (European Financial Stability Fund), the SMP (Securities Market Programme) profits that will surge in July to a total of 3.1 billion, and possibly an increase of the T-bills ceiling, which is also much needed for the banking system.

The latter has lately come under enormous pressure, as withdrawals have reached a record of 1.4 billion per day in the past two days. Some Greek officials point out that capital flight from Greek banks is not going to stop even in the event of a positive outcome of the extension’s negotiations, and therefore believe capital controls could still be put in place further down the road, but at least for now, and given a deal maybe signed this week, the risk will be diminished. That being said, in practice, some unofficial controls are already in place, as Greek banks refuse to execute big money orders on the spot.

On top of that, other weaknesses have been identified in the banking system: a shortage of T-bills to use as collateral for to obtain the ELA (between 7 and 15 billion left), and a dangerous depletion of deposits to a scary level – the number floated is currently 120 billion Euros, and if they go under 100 billion the banks might just as well shut down. There is also – down the road – a problem with NPLs, now judged to be unofficially close to 90 billion Euros.

For this reason, the Greeks have been quietly pressing – in the context of the extension – on the ECB to consider an increase in T-bill issuance, or a reinstatement of the exemption that would allow Greek banks to get cash directly from Frankfurt.

A Bumpy Road Ahead

Once a deal is sealed in Brussels, the question becomes whether the Greek government and its parliamentary majority will be able to pass it, and what the effects of this passage will be on the current political equilibrium in Athens.

For now, the general sense is that, while the deal itself is likely to pass assuming the promise of debt relief down the road and possibly requiring a little help from opposition parties To Potami and New Democracy, the implementing of the measures will be very tough to approve and perhaps even to table. And, needless to say, the Institutions will have strict control over such process, which means there could be new, potential conflict down the road.

But nevertheless there is a justifiable sense of relief that Tsipras did not “commit suicide” on Monday, and cautious optimism prevails in Brussels for a program extension beyond June 30 that would allow time for a full agreement on Greece’s budget and debt profile.

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