Greece: Final Push for Weekend Deal

Published on June 25, 2015

Headlines out of Brussels today and wildly divergent reactions from government officials to the latest flurry of rumored proposals and counterproposals have confused markets, to say the least, further exacerbated by incomplete or inaccurate tweets from the blogosphere.

Here is our understanding of what is going on:

* The Institutions prepared and presented a new, and modified, set of proposals to the Eurogroup Finance Ministers that incorporated parts of the weekend (but not today’s alleged) Greek counterproposals into its plan. This is the plan that was being touted this morning by Eurozone Finance Ministers as a “good basis” for further discussions, and which should have been discussed at the just postponed Eurogroup ministerial and then heads of state meetings – ideally.

* In the meantime, however, the Greek side prepared and presented its own, new, and modified “last-ditch” proposal to the Eurogroup Finance Ministers. That “Greek” plan is the plan that EU officials are either politely or less than politely reserving judgment on, intensely frustrated at yet another round of back and forth with Athens after so many “take it or leave it” offers.

* This ongoing game of “ping pong” and parallel plans at this point of the game has being pointedly referred to as “a step backwards by Athens” by, among others, not just German Finance Minister Wolfgang Schaeuble, but by even Chancellor Angela Merkel herself. This is all the more the case when after yet another round of all-nighters from Institution officials over pizza (and Belgian pizza at that), staff level officials already went out of their way to incorporate so many of the demands presented by Greece into their proposal just last week.

* The EU plan, as we have expected and they have repeatedly warned, did not however yet include an explicit and proactive commitment on debt relief. But no one has closed the door on anything yet, and the Greek plan almost certainly will include (fading) demands for proactive commitments on debt relief – and will be discussed over the weekend before markets open on Monday.

* When it comes to the budget itself, while the EU Institutions’ newly revised changes to the all-important pension reforms required of Greece are still material areas of dispute, we believe at least enough of the differences on pensions at this point can be gapped and do not think these will ultimately be deal killers. The latest proposal appears to split the difference on three major points of contention that were raised earlier – those include calls for Athens for faster movement on hiking the retirement age to 67 years, tackling the early retirement exemptions for certain professions, and phasing out the “solidarity” reimbursements to lower income pensioners – all “red-lines” we have written Athens has long hinted it can ultimately, and grudgingly, move on – perhaps more aptly called “pink-lines.”

* The truth is that by finally moving last weekend even marginally on the pensions front, Greek Prime Minister Alexis Tsipras managed to present a deal and prolong negotiations on the social security safety net  that while clearly failed to put enough on the table for a full agreement, has become very difficult to reject outright on a political basis, and the EU and IMF have responded in kind. They never, after all, as accused by Syriza, demanded cuts to the poorest constituents, not even the dreaded IMF. But even with the movement closer, but not yet there, on pensions, the fiscal gap nevertheless remaining between the Greek and EU targets remains large, which explains to some extent the renewed focus on VAT and other revenue raising measures.

* The numbers officially leaked are that Greece has presented 8 billion Euros worth of budget savings versus EU demands for 9.5 billion in savings, but the exact size of the gap remains unclear as many of the Greek savings still rely on “parametric” measures and noble but highly dubious targets for greater tax collections and administrative reforms that have met with limited success to date, to put it politely. And so while the EU has moved closer on the Greek tax plan it interestingly is holding out now on for example promising flexibility on the timing of VAT hikes for the Greek islands, a concession Tsipras thought he already had in the bag.

* The notable absence however of any further explicit promise up front for debt relief, suggested as a possibility in 2012 after the completion of Prior Actions from the program now ending, will clearly be the largest material point in the political level discussions that will now ensue. We strongly suspect the Greek proposal will continue to press for this, but that Tsipras will not get an explicit deal on debt relief before agreement is reached on the fiscal side and, furthermore, the difficult verification process has been undergone in Greek parliament. Athens will likely be given some additional verbal assurances of the (conditional) possibility of debt re-profiling at the end of the road to sell to his constituency at home, for what that is worth, but we suspect he will not get much more than that up front, certainly not without legislation and implementation of measures as a condition.

* Pension cuts, less than concrete and continued conditional commitments on debt relief, cuts in defense spending, and some controversy on the islands (the latter which we believe can be resolved easily) will be sure to not just create headaches within Syriza, but could also alienate Syriza’s coalition partner, the right wing ANEL, or Independent Greeks, who have specifically championed protecting the islands as their cause celebre.

* But while potentially losing the support of the left wing of Syriza – perhaps 15 to 30 delegates – and perhaps some kooky ANEL support in parliament, will certainly not be the best news for Tsipras, it may not spell his death knell.

* Morever, the continued EU hardline that would in effect force Syriza to draw on a broader base of support from parliament, including from opposition parties Potami, Pasok, and New Democracy, and a broader, cross party, and more democratically representative commitment, quite frankly, would not be an unwelcome development for the rest of Greece’s Eurozone partners – not that we would (openly) suggest forcing Tsipras to draw on opposition support could be a deliberate game plan for Eurozone officials.

* And the political pressure is not as crass or simplistic as some would assume of the EU attempting to force what would be highly disruptive regime change – certainly not after the democratic uproar over the Berlusconi and Papandreou ousters – but simply a statement of fact that has been pointed out to us that the participation of other parties could ensure continued pressure on Tsipras to deliver, and ensure at least a modicum of longevity to any agreement were the government in Athens to change at some point in time. As you may recall, the EU’s positive history of legislation passed on a cross party basis in Portugal, in contrast to the ongoing struggles with Greece, has not been lost on EU officials struggling with the ideologues of Syriza (see SGH 6/3/15, “Greece: Rocky Roadmap to a Deal”).

* As for Tsipras himself, he will have to bite the bullet and seek some help from outside his coalition, but this is where margin matters. But with just barely enough concessions from the EU to bring home, a newly re-opened nationalized TV station that is now fully a Syriza voice-piece for propaganda, and party discipline that may be stronger than many suspect, he could yet claim victory and survive some modest levels of defections.

Bottom line:

* The only realistic positive outcome – and our base case expectation – has not been for the disbursement of the 7.2 billion Euros remaining in Greece’s bailout tranche before June 30 – that ship sailed long ago. It has rather been for a messy and painfully agreed extension to hammer out a full deal, and that still seems likely (see again SGH “Greece: Rocky Roadmap to a Deal,” and SGH 6/23/15, “Greece: A Possible Deal, a Bumpy Road Ahead”).

* An extension would probably be benign for markets, as generally expected, but if reached under duress and stressful market conditions before or even after the weekend, could nevertheless also need to be accompanied with capital controls anyway in order to stem the hemorrhaging of assets from the Greek banking system.

* As to any bridge financing, there has as you will recall from our previous reports been a willingness to consider the release of EFSF/HFSF funds to help bridge the July/August ECB payments and gaps for funding Greek debt in case of a partial agreement and positive progress for a deal. But that may not come in time for the IMF payment on June 30.

* What could be available – if and only if negotiations proceed as planned – by then would be the 1.9 billion Euros of the SMP profits withheld by the EU to now if Greece shows some modicum of having fulfilled “Prior Actions”, with another 1.4 billion coming available in July – just enough to keep Athens on a tight leash. If there is a deal in sight, the ECB may even finally agree to raise the 15 billion Euro T-bill issuance limit for Athens by then.

* The alternative – which unfortunately we cannot still fully rule out – would be to risk a full collapse in negotiations that would lead certainly to capital controls, no interim funding and the specter of default, and with it far more dire consequences for Greece. But that Plan B, as it is increasingly being referred to in EU circles – is still not in our base case as things stand.

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