Greece: Averting a June 30 Accident

Published on June 10, 2015
SGH Insight
"EU officials, we believe, are now considering various options for extending the program for a short period of time beyond the June 30 deadline, perhaps even through the summer, in order to allow more time for negotiations."

"They also for the first time last week offered Greece a significant carrot in hinting (albeit not formally committing) they may grant Greece access to 10.9 billion Euros of funds already allocated and disbursed by the EFSF to the HFSF (Hellenic Financial Stability Fund), (see SGH 06/03/15, “Greece: Rocky Roadmap to a Deal”)."
Market Validation
(Bloomberg 6/26/15) "In a week where hopes of a deal on Greek finances have been raised and dashed repeatedly, Spanish and Italian bondholders have kept faith that an agreement will be reached.
As negotiations between Greece and its creditors continued, Spain’s 10-year securities headed for their biggest weekly gain in four months, and benchmark German bunds extended declines. Spanish bonds erased an earlier drop Friday as a European Union official said Greece’s creditors had proposed a five-month extension to the country’s aid program, and 15.5 billion euros ($17.4 billion) of disbursements, in negotiations to unlock funds."

After a great deal of public acrimony and recriminations over the flimsy counter-proposals presented by Greece to its EU partners at this late stage of the game – including a questioning of whether German Chancellor Angela Merkel and European Commission President Jean-Claude Juncker should even agree to meet with Greece’s Prime Minister Alexis Tsipras – the parties have finally agreed to meet and continue “constructive discussions” through at least tomorrow.

That is not to say EU officials are any less displeased with Athens’ negotiating tactics; it rather reflects a last ditch effort to avert a looming crisis come June 30 when Greece’s program officially expires.

** That is because it now appears highly unlikely Greece and its creditors will meet the original timetable envisioned for achieving an agreement, or at least a staff level agreement, by June 14, that would then be ratified at the Eurogroup meeting on June 18, and subsequently passed through Greece and the respective creditor countries’ Parliaments (namely, Germany and Finland) by June 30.

** Even as frustration at this slow pace of negotiations rises to a boil, EU officials, we believe, are now considering various options for extending the program for a short period of time beyond the June 30 deadline, perhaps even through the summer, in order to allow more time for negotiations – assuming a deal is anywhere to be had. There are reports that Greece may request an extension through March of 2016, but such an extension would be costly, and tantamount to a new program, and we believe not feasible at this stage of negotiations.

** But even a short extension needs to be funded, and an extension, be it a formal extension of the program or another “agreement” akin to the February 20 deal, through July and August would of course run smack into the 6.7 billion Euros of SMP bond redemption due to the ECB, and would also require funding to cover the 1.5 billion Euros due to the IMF as well as subsequent bullets coming due.

** EU officials, led by Germany, have been adamant for now in recommending no disbursement of the final 7.2 billion Euros tranche of the existing program be made until Greece fulfills its obligations in full. However, they also for the first time last week offered Greece a significant carrot in hinting (albeit not formally committing) they may grant Greece access to 10.9 billion Euros of funds already allocated and disbursed by the EFSF to the HFSF (Hellenic Financial Stability Fund), but up to now reserved exclusively for potential banking recapitalization operations, and which were returned to the EFSF as part of the February 20 agreement for safe keeping from Syriza’s hands (see SGH 06/03/15, “Greece: Rocky Roadmap to a Deal”).

** Perhaps most importantly, while a specific quid pro quo has nowhere been outlined or made clear, our understanding is that EU officials would furthermore not be averse to having those funds be applied to paying down the ECB and IMF debt due over the next two months (see again, “Greece: Rocky Roadmap to a Deal”). And given that those funds have already been disbursed and allocated, their release, even if for a different purpose than originally envisioned, may present less of a political challenge than the formal release of a Troika tranche payment.

** For any of this to happen, Tsipras will still need to deliver additional and highly visible budgetary concessions to the creditors beyond those already proposed, if anything for domestic public consumption for the creditor countries (agreement on the primary budget surplus would be a good starting point). To leave room for that, the creditors took care to leave some flexibility for Greece in their demands on some of the politically charged “red line” issues, including on the crucial fight over pension reforms. For example, while Tsipras has fiercely vowed to protect pension costs for the lower classes, we believe that to be somewhat of a political straw man, at it is a concession we understand the EU would happily grant assuming he can find some cuts elsewhere.

** An alternative to providing funding relief via the EFSF/HFSF route would be a granting of partial disbursement of program money for partial completion of the program. While possible, this would represent a clearer shift from the EU’s previous position and may thus present a higher hurdle to political ratification either in national Parliaments or budget committees.

** Given the considerable deficit of trust that has built around the Tsipras administration and its willingness or ability to deliver on promises, any disbursement will also require and be contingent on passage of legislation through the Greek Parliament. Clearly, Tsipras’ ability to deliver even a partial victory in winning more time will help solidify support within his own party.

** But furthermore, despite the very public and often bitter disputes between Syriza members, when push comes to shove we believe party discipline may be considerably stronger than most analysts currently expect when it comes to a vote on which the survival of the government may ride.

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