Greece: Some Progress, but No Relief

Published on May 8, 2015
SGH Insight
"The tenor of negotiations has certainly improved over the last week and there will probably be sufficient movement by Monday for the Eurogroup to strike a cautiously positive note , however it is highly unlikely Greece and its EU partners will be able to show sufficient progress to confidently point to an imminent release of funds."
Market Validation
(FT 5/11/15) "Greek stocks recovered from their lows of the day but remained sharply lower, as eurozone finance ministers once again try to reach a deal that would hand cash to the government in Athens this month.

Ministers are meeting in Brussels with the government of Greek prime minster Alexis Tsipras needing to make a payment of €750m to the International Monetary Fund on Tuesday.

Greek stocks were down 2.6 per cent at 817.05 in late afternoon trading, while yields on its three-year bond were up 15 basis points at 20.1 per cent."

Three points stand out in the run-up to the critical Eurogroup meeting this coming Monday over the fate of the Greek bail-out program.

*** First, while there will probably be sufficient movement by Monday for Eurogroup President Jeroen Dijsselbloem and his fellow finance ministers to strike a cautiously positive note at the Eurogroup meeting, it is highly unlikely Greece and its EU partners will be able to show sufficient progress to confidently point to an imminent release of funds from the remaining 7.2 billion Euros of funds from the current program, much less any fresh money from a new program. That would only be possible once there is firm assurance Greece will indeed implement and complete the provisions of its current program. ***

*** That, in turn, makes it very likely the European Central Bank will raise collateral requirements on Greek assets next week. There is plenty of technical justification for doing so, and a delay in the absence of imminent financial relief for Athens can only be seen as political. But the ECB is probably going to at least take some of the sharp edge off higher collateral requirements by bumping the higher rates only modestly back to the levels that prevailed until last October, when the collateral requirements were loosened in recognition of the reforms put in place by former Prime Minister Antonis Samaras, and not to more dramatic default levels. ***

*** And third, even though EU officials will probably note substantial but not yet sufficient progress in the negotiations on Monday, it is also unlikely the ECB and the EU will have sufficient grounds to increase the 15 billion Euro cap on T-Bill issuance imposed on Athens. Greek officials have maintained that a hike in the T-bill ceiling is essential if Athens is to avoid imminent default. But ECB and EU officials believe Greece will have sufficient funds to make its 750 million Euros IMF payment on May 12 and to fund itself through May without any increase in T-Bill issuance. ***

Even if that ends up not to be the case, EU officials are increasingly unwilling to be held hostage to Athens’ budgetary schedule, and have for some time started to hint and telegraph a willingness if it were to come to that unfortunate event to see Athens cross into default – albeit one that would hopefully be short-lived as constructive negotiations continue. That is especially the case if the cause of a default were to lie clearly on Greece’s doorstep, and its own mishandling and foot dragging on budget negotiations.

Better, but not Yet Enough

The timing of an ECB decision on collateral need not necessarily be tied to the next week’s weekly Wednesday meetings where Greek Emergency Liquidity Assistance increase requests have been discussed, and it could even possibly slip into the following week. But apparently the decision to hold off on hiking the collateral rates was already a matter of some serious contention at this Wednesday’s meeting and dinner .

In addition to opting for the least disruptive adjustment, ECB officials will nevertheless likely attempt to temper any outsized negative market reaction to the higher collateral requirements by asserting it is only a technical decision reflecting Greece’s deteriorating finances, and not necessarily a negative reflection on the progress being made on the politically-charged fiscal negotiations.

ECB officials will also likely point to the flexibility being shown on raising the ELA every week and the approximately 3 billion Euros of cushion that is built into those numbers. Warning investors that such a decision may be imminent could also help temper some, if not most, of its potential negative edge.

On a positive note, the tenor of negotiations has certainly improved over the last week. More importantly, the government of Prime Minister Alexis Tsipras has started to show some flexibility on concrete “red-line” issues such as privatizations and VAT tax reform (see SGH 4/21/15, “Greece: Inching to that Deal”).

And the fact that Tsipras last week held back on presenting an omnibus bill to his cabinet is also being seen by EU officials as positive acknowledgment of requests from the European Institutions that Athens not waste precious time and political capital in passing decrees and legislation before consulting with them.

EU officials also specifically welcome indications that Athens may be looking to simplify its VAT tax system. While VAT reform may not be a revenue raiser in and of itself, a simplified tax code is seen as a positive step towards cracking down on systemic gray areas that allow for tax avoidance.

A new “Drop-dead” Date

Having said that, there is, perhaps not surprisingly, a good deal of skepticism over projections by Athens of 5 billion Euros per year in additional savings resulting from overall increased tax collections. And the major areas of outstanding divergence remain the same: labor and pension reforms.

Assuming Greece does indeed make the May 12 IMF payment, even without an assist from the ECB and EU, the end of May is increasingly being now seen by European official as the new “drop-dead date” for a deal. That is the case not just from a cash crunch perspective, but also from a logistical perspective that would allow the EU enough time for discussion and parliamentary ratification of any disbursements from the existing program, far less approval of a new program, before the June 30 legal end date of the current program.

In short, discussions between Athens and the EU have taken a turn for the positive, and this development will be noted and emphasized at the Eurogroup meeting. But it is unlikely this will yet result in any immediate and concrete relief on the financial front for Athens; if anything the squeeze could even be tightened a bit more, almost apologetically, by a decision to raise Greece’s collateral rates, even as negotiations continue on a positive tone.

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