Greece: Cautiously Positive

Published on July 9, 2015
SGH Insight
"On first blush, Athens looks to have moved enough to make it awkward for the EU to say no, though not enough to make it an easy or certain yes. But while the Eurogroup might come still back to ask for a little more in the closing hours, on balance, we are cautiously optimistic a deal is indeed in the making by the end of the weekend that will enable the European Central Bank to maintain its lifeline to the Greek banks and to keep Greece in the Eurozone."
Market Validation
(Bloomberg 7/10/15) "Global markets signaled growing faith in Greece’s ability to clinch a bailout, as U.S. and European stocks climbed and the euro jumped the most in more than two years against the yen.
The Standard & Poor’s 500 Index climbed 1.2 percent at 12:37 p.m. and the Stoxx Europe 600 Index capped its biggest two-day gain since 2011."

The new Greek proposals for economic overhauls and budget consolidation were presented to the EU late this evening, accompanied by conciliatory letters from Greek Prime Minister Alexis Tsipras and Finance Minister Euclid Tsakalotos, driving a cross current of headlines in the last few hours.

*** On first blush, Athens looks to have moved enough to make it awkward for the EU to say no, though not enough to make it an easy or certain yes. But while the Eurogroup might come still back to ask for a little more in the closing hours, on balance, we are cautiously optimistic a deal is indeed in the making by the end of the weekend that will enable the European Central Bank to maintain its lifeline to the Greek banks and to keep Greece in the Eurozone. ***

A Bona Fide Political Effort

It looks to us like Prime Minister Alexis Tsipras and his government has made a bona fide and serious effort under very challenging parameters to reach an agreement that is going to alienate the left wing of his Syriza party, but which is certain to win the broader support of the other opposition parties.

After the shocking 60% no vote in last Sunday’s referendum rejecting the latest EU plan, German Chancellor Angela Merkel pointedly warned Tsipras that all deals to date suggested by Athens had fallen short, and that if Tsipras and Syriza had any genuine desire to remain full members of the Eurozone, the time had come for a serious new proposal that would have to go farther than what had already been on the table, whatever the referendum results.

This plan, even if disappointingly and frustratingly marginal in places, has done just that, despite a great deal of skepticism in markets and political circles over Tsipras’ true intentions and commitment to the Euro, and the higher political challenge after last weekend’s referendum to delivering a deal acceptable to the EU.

As you will recall we very early on maintained that the more cynical internal calculus in Athens was in expecting and planning on a narrow referendum victory or even actual defeat that would have suited Tsipras just fine, after which any movement on “red lines” could politically be countered with a victory on debt re-profiling that was increasingly clear to all, even the most hardliners of the EU, would be needed, if only Greece agreed to a degree of conditionality in advance.

That did not quite play out as planned, but Tsipras has expended the political capital to present a stepped up plan regardless of the referendum.

And we have also long maintained that Tsipras could and will probably survive passage of fiscal measures with the support of opposition parties, and was equally likely to weather what for all the noise may end up a rather more limited fallout from the left wing of his own party. That also appears to be playing out.

The political pieces, in other words, are falling into place.

Numbers Matter

That in itself is a huge positive in the eyes of the creditors who have pressed for broader political support to lift the probabilities that Athens will be able to follow through on its execution. The numbers, and “scoring” the new specific proposals, will of course also have to fall in place.

The highlight of the 13-page plan is a fairly aggressive revamp of the sales-tax system to generate savings equal to 1% of the GDP, and a somewhat less ambitious overhaul of the pension system that the Greeks nevertheless assert will generate an equal level of nearly 1% of GDP in fiscal consolidation for next year.

We knew the Greeks needed to up the ante from 8 billion euros in fiscal consolidation, and according to Greek officials, Athens was aiming for budget consolidation measures of between 14 and 16 billion euros to make the mark. They look to have reached around 10 to 12 billion euros in the budget consolidation, so the proposal at first glance seems to fall slightly short of what’s expected by the Eurogroup.

But that they did get the target number up as high as they did is certainly a good sign, and first indications from EU officials are that the two sides are only a few billion euros apart. It should be noted, though, that the 10-12 billion Euro number is for now an estimate leaked out of Athens that has yet to be scrubbed by the Eurogroup.

And if as leaked, the proposal includes an extension of the property tax for one more year, that from what we remember is real money and could be relatively significant. The VAT proposals are hard to truly assess at this point but they look to be going far enough in addressing most of the creditor demands on this front.

The VAT on restaurants will be raised to a maximum of 23% while the discounted rates for the islands will be phased out. And the Greek proposal also includes an increase in the corporate tax rate to 28% from 26%, but the one-off corporate tax hike the IMF so disliked has been dropped.

On pensions, we always knew Athens could and would move on the exemptions and early retirement issue. The biggest sticking points there have been on the timing of the implementation of long promised reforms, and Athens has moved (modestly) on those. If anything, we expect what may raise immediate Eurogroup hackles may be the whole “we will come up with a new program in 2016” element if needed in what they are proposing.

This is nevertheless a positive signal, and we suspect some of the spin coming out of Athens on massive internal fights over movement on these pensions “red lines” may be intended for EU consumption. But that is why we have in the past rather referred to some of those as “pink lines.“

Trust but Verify

At the end of the day, or more to the point by Sunday, the biggest question still hanging over the proposal and any remaining fine tuning will be the process of its implementation, or put more starkly, it is less about the hard numbers than it is the will and credibility of the commitment to meet the targets. Trust but verify might be the Eurogroup’s guiding instructions.

The Eurogroup will demand strict oversight of its execution, most certainly with benchmarks along the way, before the release of additional money, and the bill will be huge. But in another critical nod to the creditors, Athens has softened its (public) explicit insistence of a firm debt re-profiling commitment in advance – frankly because there is so much consensus by this point that if there is a deal, it (and liquidity if needed in the interim) will be forthcoming.

As we get into the weekend, while certainly a financial calculus, the decision whether to sign off on the Greek proposal is ultimately, and always was going to be, a political one. And as we noted, this proposal may just provide enough credible consolidation to be hard for the Eurogroup, even the Germans, to say no.

Back to list