Greece: Inching to that Deal

Published on April 21, 2015
SGH Insight
"From what we understand, despite the negative headlines, there has been some limited progress in negotiations at the technical level between Greek officials and the "Brussels Group" Specifically both sides have moved closer on the thorny issue of privatizations, and on a political level Greek sources maintain that both sides are settling on a compromise primary budget target of somewhere between 1.2-1.5% of GDP."
Market Validation
(Bloomberg 4/22/15) "Spanish and Italian bonds rose, reducing the yield premium over their German counterparts, after Greece’s Finance Minister Yanis Varoufakis fueled optimism that the nation and its creditors are narrowing their differences. Spain’s 10-year yield dropped by the most this month. Greek bonds rose, pushing the three- and 10-year yields down from the highest levels since 2012."

(Bloomberg 4/23/15) "The euro strengthened the most in one week against the dollar on speculation that Greece and its creditors will reach a deal to receive aid payments before the country runs out of money."

Greek markets sold off today on reports of European Central Bank contingency planning over the treatment of Greek bank collateral in case of alternative scenario cases for an orderly, or disorderly, default by Athens.

Indeed, markets should be nervous if the ECB were not conducting prudent contingency planning at this stage of the game.

*** From what we understand, despite the negative headlines, there has been some limited progress in negotiations at the technical level between Greek officials and the “Brussels Group” consisting of the EU, IMF, and ECB (see SGH 4/16/15, “Greece: Another Missed Deadline but no Default (Yet))”. The Euro Working Group is scheduled for a conference call tomorrow to evaluate the progress made before reporting back to the finance ministers in preparation for the Eurogroup meeting on April 24. ***

*** Specifically both sides have moved closer on the thorny issue of privatizations, under now dramatically lowered expectations, and on a political level Greek sources maintain that both sides are settling on a compromise primary budget target of somewhere between 1.2-1.5% of GDP, although this is yet to be corroborated by the creditors given the major open questions that still remain. Those questions continue to center around pension reform and structural reforms to the labor market. ***

*** If and when – one would hope – there is an agreement, the risk of Prime Minister Alexis Tsipras not being able to pass some of the legislation required by the Eurozone partners through the Greek Parliament we believe also may be lower than widely reported or feared. Despite rumors of a major rift between the more pragmatic and “hardline” wings of the party, ultimate defections should be limited and unlikely to block the final passage of legislation by Syriza, on the back of its own coalition, that the European Institutions will require Athens to pass as a token of goodwill before the disbursement of funds. ***

Raiding Municipal Coffers for Cash

While negotiations continue, the Tsipras government has placed itself in a position to meet its obligations through April and possibly even to meet the IMF bullet payment due May 12 through a controversial decree yesterday demanding municipalities remit their cash balances to the central government in “short-term repo loans.”

And as discussions with the Brussels Group enter into what we believe will be its final stages before the May 11 Eurogroup summit, the market’s attention will – assuming a default is averted – soon turn to implementation risks of a deal both in Greece and across EU parliaments.

Our expectation is that while the Radical Left wing of Tsipras’ Syriza Party will certainly object to numerous provisions of any compromise struck with the old “Troika,” Tsipras will probably be able to find the votes within his own coalition to pass the legislation required to unlock fresh money from the EU.

And while it may seem a stretch to make such a call with no knowledge yet of what the terms of any actual labor or pension compromise may be, Tsipras and his allies in preparation have been astutely sprinkling their “red lines” with a healthy dose of “red herrings” in negotiations with the EU.

For example, on the politically charged and socially sensitive issue of pension reforms, Syriza has vowed to protect the population from the “deep pension cuts” they allege the IMF and creditors to be demanding, when in fact the focus of much of the attention of the creditors is as much on the numerous expensive early retirement exemptions written into the system as it is on the actual benefits levels per se.

Furthermore, we expect Tsipras, where he can, to only bring the bare minimum of provisions required to a vote in parliament. What will come to a vote, by the time a vote is held, Tsipras will sell as the bare minimum acceptable to the creditors and one that should meet the “defiance” smell test to pass with a slim majority of the Syriza/Independent Greek coalition, without the need to turn to opposition parties for help.

Translation: The cost of a “no” vote will also be high.

Political observers in Athens point to an internal show of hands held by Syriza, after the original February 20 “extension agreement” with the Troika where despite major objections from the Radical Left wing of Syriza when push came to shove apparently only five or six delegates out of 149 rejected the deal outright, including the Radical Left leader and Energy Minister Panagiotis Lafazanis. While approximately 30 or more delegates were conveniently absent or abstained from that vote including some former Pasok members, those left wing members were nevertheless unwilling to formally vote down their own prime minister.

Those same dynamics will likely hold in case of a vote where the stakes could well be all that much higher for Greece and the government. Even if, as is quite plausible, the government were to lose one or two votes from its 13 Independent Greek coalition allies, even with five or six Syriza defections they would still squeak above the 150 seat threshold needed to pass legislation.

Not Without its Risks
In the event Tsipras is unable to pass legislation under the power of his own coalition, the opposition New Democracy has already offered its support in case it is needed for emergency unity legislation in order to save Greece from bankruptcy. But that would be a bitter pill indeed for Syriza to swallow, and most probably would be rejected.

Even passing legislation with the support of the To Potami or Pasok parties could lead to pressure on Tsipras from within his own party to call early elections. And that could be risky.

Syriza members nevertheless continue to feel that early elections would lead to an even larger Syriza majority. And while Tsipras’ ratings have, not surprisingly, fallen from the low 70% area to 55% in a poll released just yesterday, they point out that even at 55% he still stands two to three times higher than where the former Prime Minister Antonis Samaras stood at this time last year.

The likelihood is that it will not come to that.

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