Greece: Breaking the Impasse

Published on April 28, 2016

Representatives from the “Institutions” (the European Central Bank, International Monetary Fund, European Stability Mechanism, and European Commission) were unable on Tuesday to finalize an agreement with Greece to conclude the now almost eight-month long first review of the country’s third bailout program.

And not surprisingly, Greek assets took it on the chin on the news delegates would be packing their bags, yet again, to go back home to Brussels.

*** But despite the negative headlines, we believe there is progress and growing room towards a compromise to finally break the grueling impasse that has blocked the disbursement of funds to Greece. That could happen perhaps as soon as after a week or two more of intense negotiations. ***

The Current Impasse

Athens has been at odds with a request from a highly skeptical IMF to pass specific “contingency measures” that could be used to offset the potential future risk of Greece not reaching its stated fiscal targets. The government of Prime Minister Alexis Tsipras has instead suggested an automatic “stabilization” mechanism that would slash ministries’ spending by 5% in the event it misses its targets.

The IMF, however, already considers “contingency measures” a compromise position, and is requiring these come with specific commitments and an identifiable “trigger” to preserve its own credibility as a lender – even though we understand its contribution to the current program will be limited to a few billion euros.

Eurozone finance ministers are now seeking to forge a compromise on the IMF-dictated measures. And for their part, we believe they will also finally initiate talks about possible debt relief measures for Athens.

Assuming there is agreement on the contingency plans, that long awaited debt relief (“re-profiling,” not haircuts of course), could be announced simultaneously with the agreement on Greece’s future obligations. That would help take some of the political heat off of Athens, as well as back in the Hague and Berlin.

A Painfully Long First Review

The negative outcome of this week’s talks came as a surprise to Athens, as Greek officials believed that most of the heavy lifting had already been done after the passage of 5.4 billion euros worth of measures previously agreed upon by Greece and its European creditors.

But Athens was unlucky enough to find itself caught in the crossfires of a harsh political confrontation between the IMF and the European Commission.

The IMF has been stubbornly refusing to give its green light on the first review without further guarantees that Greek finances will be kept in check through specific “contingency” measures, to be approved immediately by the Greek Parliament and to be activated down the road if projected fiscal targets are not met.

The Fund – which is currently only participating in the program as an advisor – has been questioning Greece’s debt sustainability since the very beginning, and for months it has been pushing for either a larger debt relief package by the Eurozone or, as an alternative, for a wider Greek budget surplus, delivered through more austerity.

Of course, neither option is particularly appealing: bigger debt relief is taboo for the Eurogroup, and further austerity measures have been ruled out by Athens.

On top of that, the IMF does not really trust the Greek budget figures provided by Eurostat – the EU statistics agency – which are seen as too optimistic, nor does it trust the current European Commission, which it deems too lenient towards Athens.

Yet its future participation in the program as a creditor, while mostly symbolic in terms of financial commitments, is considered “conditio sine qua non” for the German and Dutch Parliaments to sign off on the first review and approve the subsequent disbursement of funds to Athens.

Greece and Eurozone’s Limited Options

In the past two weeks, however, the IMF has softened its original position – from requesting further cuts or further debt relief to being content with specific “contingency” measures (more VAT hikes, further pension cuts, further public servants’ salaries cuts). But it is still pushing for the contingency legislation to be approved immediately, and for specific conditions to be set under which the measures would be triggered.

But Tsipras, who is already ten points behind in a hypothetical electoral run off with New Democracy leader Kyriakos Mitsotakis, and who has quietly dropped from soaring heights down to a dismal 25% approval rating, cannot possibly agree to that.

So the Greek Prime Minister has been resorting to some of his best-known tactics – leaking phone conversations between the Greek government and the IMF, threatening to request a Eurozone summit to bring the confrontation to a political level, and in general re-opening the Greek crisis “Pandora Box,” at a time when no Eurozone leader really wants or can afford to deal with it.

Only, this time around, he is doing so from a much weaker position than last year.

Indeed, while Greece’s Eurozone partners may be in a hurry to close negotiations and disburse the money before June – and the heat of the Brexit referendum campaign – Athens is in no position financially to drag this on much further either.

The Greek government is already running out of money for internal payments well before its July deadline for payment of a 3.5 billion euro bullet to the ECB, and has started pulling the same accounting tricks it did last summer, raiding supplementary pension funds as well as other profitable state owned companies.

And any threat by Tsipras of pulling the snap election – or referendum – card again would under current polling measures be close to suicidal, with a more than even chance Syriza would be ousted from power.

In all fairness, and that is also a positive, the Greek government has not ruled out committing to further, future cuts – hence the proposed “stabilization” mechanism under which the ministries’ budgets will be cut by 5% automatically if fiscal targets are not reached.

But to get his tranche disbursement, Tsipras will have to set out more specific measures to appease the IMF.

To help sell that to the Greek Parliament, Eurozone countries have indicated they may be willing to discuss debt relief measures – or at least specific commitments – at the same time as they discuss Athens’ obligations (prior actions and contingency measures).

Once Greece manages to pass the prior actions and some version of the contingency measures, and once the terms of debt relief have been clarified, the ESM will then have to approve the disbursement of the second tranche, which the cash-strapped country so desperately needs, and which would come perhaps around the end of May at this point.

That is why EU leaders are dreading any delay that would carry negotiations beyond mid-May – straight into Brexit referendum territory – a time when EU leaders will be extremely reluctant to act on any controversial measures, let alone deal with yet another Greek crisis.

A repetition of last summer’s drama between Greece and its creditors, we believe, remains highly unlikely.

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