Greece: From Here to Elections and Cash

Published on July 22, 2015

On tonight’s vote: The Greek Parliament will vote tonight to pass the second round of measures agreed to at the historic weekend meeting between Greece and its EU partners on July 13. The vote tonight will pass with no problem and will have zero effect on the by now well-covered political dynamics between Prime Minister Alexis Tsipras and the left wing of his Syriza party, on the balance of power with the opposition parties, or on the odds of an early election in the fall. Tonight’s vote is ¬†specifically to approve the more technical EU wide BRRD bank resolution measures and reform of the civil code required by the Institutions following the far more politically explosive commitments on fiscal “prior actions” that were already passed last week.

On a third vote : The singular reason tonight’s vote will be a non-event for markets is that Tsipras has stripped out the hike on tax rates for farmers that we were told as early as last week could be a problem in eroding Tsipras’ margin for the second round vote through the potential loss of some New Democracy opposition votes (see SGH 7/17/15, “Greece: Beyond the First Round Votes”). There will be a good deal of drama around this third vote, and the possibility of potential additional defections within Syriza, with political analysts pointing to a 120 “minimum threshold” of his “own party” votes that may determine whether Tsipras survives his rebellion or not. But EU officials are taking the tactical decision to split the legislation into the third vote in stride, and we expect that vote will pass as well for the sake of national unity before the August 20 self-imposed deadline for an agreement.

On Fall Elections and Political Risk : Looking towards the fall, while expectations are rife for a September or October general election given concerns over the long term stability of a Tsipras “minority government” once the crisis measures are passed, the opposition parties for their part ¬†are in no tremendous rush to call early elections. The agenda and timing of early elections, as we have long maintained, will be driven by a more, and not less, popular and empowered Tsipras as he moves the country towards one would hope some semblance of stability again after seven months of extreme turbulence.

The Independent Greek ANEL party for all their objections have ultimately balked at jeopardizing their tenuous position in the coalition, and the leadership of the more moderate alternative potential coalition partners, To Potami, have suggested they also may be in no rush in calling for elections at this point in time given all the country has gone through (as well as current poll results). Most importantly, the center-right New Democracy party of former Prime Minister Antonis Samaras remains in disarray. In short, they are all on their back heels.

Whether Tsipras chooses in fact to strike while he still has the political momentum and call for September elections or to wait, EU officials for their part are proceeding full speed with negotiations with the potential elections scenario clearly in mind. They expect Tsipras to be able to pass a large package in September with the help of the opposition and then call a vote for the fall – mid-October probably – and are working under the assumption that the electoral risk will not affect implementation. And if there is one statistic that confirms it all, it is perhaps a weekend poll conducted by Palmos Analysis that shows Syriza holding a whopping 42.5% to 21.5% lead over New Democracy, far above and beyond where Syriza stood in the January elections.

On MOU Disbursements, Re-profiling, IMF, and Timing: In what we believe the unlikely event Tsipras is unable at first to whip the necessary votes for the third round vote on agricultural taxes (we do not believe it will ultimately fail), the schedule of legislation could be delayed and complicate the larger ESM negotiations already underway with the EU Institutions. But while August 20 has widely been presented as a firm deadline for an ESM deal in light of the next 3.4 billion Euro ECB bullet tranche payment due on that date, any slippage over that deadline, while highly unwelcome, would not be fatal, and met with temporary assistance as long as the process remains on track.

More interestingly from a disbursement perspective, our understanding is that for institutional and logistical reasons the first rounds of support may come from the ESM only and without IMF participation, until the lengthier Debt Sustainability analysis is concluded. German Chancellor Angela Merkel has laid the marker of the first review after the MOU for that debt sustainability process to be completed – which will be if all goes as planned two months after the MOU is signed (hoped for on August 20). That timeline will keep the debt re-profiling issue alive through the other side of Greek elections – but it will it also save the contentious domestic debate within creditor countries on any kind of NPV debt relief for Greece for only after some clear evidence of compliance from Athens.

On ECB and QE Purchases of Greek Bonds : After the MOU is finalized and approved and the first money is disbursed to Greece, the first consequence for the ECB will be to allow much bigger increases in the ELA. But the waiver to accept poorly rated Greek sovereign paper directly onto the ECB balance sheet may not be reinstated just yet. Instead, the ECB we believe will plan for their own interim first review, in order to get an early assessment of Greek compliance . The intention of a potential early review before the formal two month “program” first review may not be born out of tremendous enthusiasm to rush additional financing to Greece – perhaps more from a certain lack of trust and desire to check straight away if Greece is doing its homework. But it obviously cuts both two ways – if Athens is complying its life will be made that much easier.

Our expectation for a waiver is probably mid-September, which could then theoretically pave the path for QE purchases. But the significance of the reinstatement of the waiver and eventual acceptance of Greek collateral directly onto the ECB balance sheet is far more in re-initiating the lifeline and liquidity operations directly with the ECB (instead of through the ELA and Bank of Greece), than it is on QE purchases, given the very limited quantity of bonds available for that purpose to begin with.

On the banking system : The Greek banking system has been deemed by ECB officials to be solvent, for now, with Capital Tier 1 ratios still at required levels as of the latest review. However, as we have long warned, the ECB and institutions will now need to make a thorough new assessment of not just the capital flight but also the state of Non-Performing Loans in the Greek banking system, and an ultimate resolution of the system even with fresh infusion of ESM money will certainly entail a bail-in of equity and subordinated debt creditors and perhaps some consolidation of the banking system. As for the 25 billion Euros that have been earmarked for the banks, it is unlikely that it will all be used to recap the banks. The Institutions will want to keep a buffer in place, as in previous programs, with the remaining money likely to be held by Greece’s HFSF.

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