Greece: Another Missed Deadline, but no Default (Yet)

Published on April 16, 2015
SGH Insight
"The next negotiating inflection point is the Eurogroup meeting in Riga on April 24, but any real decisions will now look to have to wait until May 11 in Brussels. If between now and then there looks to be an "imminent" accident looming, a rushed intervention at the heads of state level with a "daily escalation" plan is likely."
Market Validation
(Bloomberg 4/18/15) "Greece’s government bonds had their worst week since the aftermath of Syriza’s January election victory as the nation failed to make tangible headway in its efforts to secure funding and avoid a default.
The yield on 10-year Greek debt climbed to the highest since December 2012 as the clock ticked down toward almost 1 billion euros ($1.1 billion) of payments due next month."

Germany’s Finance Minister Wolfgang Schaeuble yesterday lashed out at the Greek government of Alexis Tsipras for wasting precious time, raising questions over its willingness if not capacity to put any serious proposal on the table to date to avert a potential looming default. And while harshly stated, there is no question Schaeuble is not alone in this extreme exasperation with Athens, dashing expectations for any sort of agreement at the upcoming Eurogroup meeting on April 24 in Riga.

God forbid any vacations would be missed, the analysis and negotiations on the technical level studies into the latest proposals only just started in earnest Wednesday of this week as both sides head into the International Monetary Fund/World Bank meetings in Washington this weekend.

*** The current hope is that the elusive Staff Level Agreement can be worked out before the next Eurogroup meeting on May 11. The working assumption had been that Greece has money until the end of April, but while the state of Greece’s public finances remains a bit of a mystery, it seems now that this date of reckoning may yet be stretched into May. And so the new, “decisive” Eurogroup meeting is May 11, the day before a 760 million Euro payment is due to the IMF. So another deadline, another delay, but Greece will truly need substantial progress as early as possible in May to avert default. ***

*** As time ticks on and the money dwindles, the budget agreement that was supposed to be finalized by the end of April will now spill over into what will surely be equally contentious discussions over Greece’s restructuring needs and a new program, or whatever they want to call the new money they will need to pay off the old. And here are where the true “drop dead” dates lie – the big bullets being the SMP program payments due on July 20 (a total of 3.5 billion Euros, for bonds held by both the ECB and NCBs) and on August 20 (another 3.2 billion Euros, for the same purpose). ***

*** Even if those payments are “swapped” into ESM credits, it would still be considered “new money” that would need Parliamentary approval in some of the Eurozone countries, Germany and Finland among others. A new arrangement/program will also need to be in place already by then that would plug the expanding additional financing holes in order to allow the IMF to continue funding Greece. If not, the gap gets even bigger, in other words, the IMF may pull out and leave what is left of Greece and the Greek program entirely in the hands of the EU. ***

*** Regarding the actual budget, European negotiators are no longer considering a sustained 4.5% primary surplus anywhere close to realistic – even aside from Greece it is historically very rare for a country to sustain that level of surplus. And the debate over Greek pensions is not its absolute level or for that matter, even its cost as a percentage of disposable income, even though by that measure Greece is by far the highest in the Eurozone, at 80-90% versus, say, Germany, which is closer to 40%. The real issue remains the political one: is Tsipras willing to step in to negotiate a full program, or are the Greeks still thinking they can get partial disbursement for partial measures? No one in the Eurogroup feels they have an answer yet. ***

Frustrations and Contingency Plans

There have indeed been no high level political discussions held at all since well before Easter, when the Eurogroup made the decision to no longer engage in negotiations with Athens until there was a more concrete budget framework hammered out at the working level that could be the basis for discussion. That led to the 16 page and then 26 page documents that were proposed and leaked before the Easter break.

Schaeuble’s frustration since then is over the lack of progress of any sort to date on even a Staff Level Agreement. Progress at the staff level was what the “six working day” deadline given to Athens was all about; that would have allowed for ten full days to get something prepared before the April 24 Eurogroup meeting. And who knows, maybe there will be some progress by next Monday, but the Easter break has been completely wasted, and there was no small amount of aggravation at the working group level when the Greeks changed their lead negotiator, due apparently to tensions between Deputy Prime Minister Yannis Dragasakis and Finance Minister Yanis Varoufakis.

But for all the headlines and the serious Greece fatigue, the atmosphere within the negotiations between the Greeks and their creditors is not as confrontational right now as it was in February.  And that is probably the best thing the negotiations have going for them as they approach the new deadlines before the big July and August lump sum payments due.

Likewise, that contingency plans were being drawn up by Member States and European institutions alike to prepare for a Greek default garnered a lot of press speculation in the last week or so, but it would have been even more surprising if the Greek creditors were not drawing up contingency plans. Within the ECB, for instance, that is one of the key functions of the central bank’s Risk Committee. So there’s not really a lot of “new” news there.

In any case, discussions are only now returning to a higher level with Varoufakis in Washington. The next negotiating inflection point is the Eurogroup meeting in Riga on April 24, but any real decisions will now look to have to wait until May 11 in Brussels. If between now and then there looks to be an “imminent” accident looming, a rushed intervention at the heads of state level with a “daily escalation” plan is likely.

A recent Die Zeit article that reported contingency planning by the German government on how to keep Greece within the EU or even the Eurozone in case of an inadvertent default under a scenario of continued goodwill negotiations was not off the mark, but it was certainly a tad over publicized, if not premature. Of course any kind of “small” default (such as on an IMF payment) could still lead to a messy and disruptive scenario of capital controls, but all that still remains in the realm of the theoretical and contingency planning.

But for all the talk of default, even as markets are certainly far more braced for a Greek credit event than they were in 2012, the political and geopolitical ramifications of even a Greek “vacation” from the Euro, a la Cyprus, would still be severe, and for all the frustration with the Tsipras government, German Chancellor Angela Merkel’s commitment to keeping the Eurozone on track should still not be underestimated.

And so through the frustration and warnings to Athens, the heads of state and foreign ministries behind the scenes are continuing to urge patience, and will push for yet another attempt at reaching a solution if no longer by April 24 in Riga, by May 11 now in Brussels, even as their finance ministries suffer from absolute Greece fatigue.

But that may be the last stop.

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