Greece: Progress on Wording, Little Movement on Substance

Published on February 19, 2015
SGH Insight
"We would venture a guess of perhaps as high as 50% odds that the parties don’t have enough time to finalize anything over the next 24 hours beyond a partial communique or agreement to keep negotiations going."
Market Validation
(FT 02/20/15) “The deal, reached at a make-or-break meeting of eurozone finance ministers on Friday night, leaves several important issues undecided. The new Greek government is to submit those measures for review to the International Monetary Fund and EU institutions on Monday, and officials said if they were not adequate another eurogroup meeting could be called on Tuesday."

** The proposal sent today by Athens to the Eurogroup – through the preliminary scrutiny of the deputies – addresses some of the semantic issues in getting to a short term extension, but provides far from enough movement on the main issue, conditionality.

** The markets and press have taken the German Finance Ministry’s public rejection of Greece’s proposal but then subsequent agreement to attend tomorrow’s Eurogroup as part and parcel of a hardline negotiating response to a “significant U-turn” or “near complete capitulation” by Athens. We think it is more serious than that. The German response is a significant rejection of a proposal from Athens that while an improvement from before, is still seen to be far from satisfactory on the substantive points of disagreement.

** The use by Athens of the 2012 MFAFA (Master Financial Assistance Facility Agreement) as a basis for negotiating an extension is progress in that it bridges the question of whether discussions are over a “loan” or “program” extension, and clever in re-capturing a positive compromise narrative, which is politically important for all sides. But the MFAFA loans were contingent on MOU (Troika Memorandum of Understanding) conditionality — very explicitly and firmly — and Greece has not moved enough on that.

**‎ Markets have taken comfort in the fact that Eurogroup President Jeroen Dijsselbloem went ahead and called a meeting of the Eurozone Finance Minsters tomorrow, which he said he would do only if there was a basis for negotiations after seeing the Greek proposal. The markets have likewise taken solace in the announcement that even after the quick rejection by Berlin, the German Finance Minister would still be attending the meeting tomorrow. And likewise, the same positive signal for continuing negotiations was seen in German Deputy Prime Minister and SPD head Sigmar Gabriel’s efforts to take the edge off the Finance Ministry rejection with more conciliatory statements.

** It is, however obvious that Germany would attend a meeting called by the Eurogroup and not stand as a lone holdout, and there is clearly too much at stake for the Eurogroup not to negotiate even on the basis of a less than satisfactory proposal from Athens. And there is enormous interest from all parties in sending positive signals in order not to trigger market stress that would create an unnecessarily difficult situation should talks indeed conclude without an agreement tomorrow.‎

** But while many analysts assume a deal will be forthcoming based on these statements and developments, and well, because everyone says it has to be done by tomorrow, we nevertheless believe Germany will stand its ground on these points, and that Greece will still need to deliver substantially more at this point for there to be any substantive agreement on a bridge extension by tomorrow.‎

** And so we remain concerned that the movement towards a compromise is coming far more slowly than the headlines and rhetoric suggest (SGH 2/18/15, “Greece: Time Dangerously Slipping”); on that basis, we would venture a guess of perhaps as high as 50% odds that the parties don’t have enough time to finalize anything over the next 24 hours beyond a partial communique or agreement to keep negotiations going. While not necessarily spelling the death knell to negotiations, that would clearly be very negative for risk markets as time is clearly of the essence.‎

** Greek officials have been attempting to provide assurances on the details of the conditionality even while continuing to refuse to stick to the letter of the MOU – under the assumption there is a compromise agreement to be had on lowering Greece’s overall budget goals to maintaining a 1.5% primary budget. And there is, but agreement on a 1.5% target in and of itself is already seen as a major concession by the EU; and it has not even been formally agreed to yet, even though we have been reporting it as a floated compromise since even before the January 25 Greek elections were held.‎

** And assurances by Athens they will not take unilateral decisions that would violate that surplus target, their plan on privatizations, 5.5 billion Euros of tax collection, and so on, while a good negotiating narrative and effort at compromise, are as we also warned yesterday far from enough assurance for Berlin, or at least they are not strong enough assurances to sell internally, to phrase the negotiations in more pragmatic terms.‎

** To be fair to Athens, they have committed to labor reform and need to move quickly, but that by definition means WITHIN the Bridge extension period. But that, in a nutshell, is the biggest political hump for Tsipras (SGH 2/13/15, “Greece: Structuring and Selling a Marginal Deal”) and why German officials are calling the Greek proposal a Trojan horse to get money now and chip away at previously agreed to conditions while they negotiate a new deal.‎

** Indeed, German officials have very deliberately and explicitly demanded Tsipras back off the promise to pass this labor market legislation in their leaked response today. That is important and reinforces all our concerns, and we suspect this will be one of the most contentious negotiating points of disagreement in that it is material, and would be a major public and humiliating step down for Tsipras.

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