Greece: Staving Default, Progress with the EU

Published on April 2, 2015
SGH Insight
“We firmly believe that despite the threats and warnings, Greece will indeed meet its April 9 payment to the IMF”
Market Validation
(Reuters 04/09/15) "World stocks marched higher on Thursday, lifted by Greece's confirming it will pay a 450 million-euro loan tranche to the International Monetary Fund."

(FT 04/09/15) "Greece repaid €450m it owed the International Monetary Fund on Thursday, sending bond yields sliding as investors’ showed relief it had met its deadline. Yields on the country’s shortest dated notes declined, with three-year bonds declining 54 basis points to 20.08 per cent and five-year bonds falling 30 bps to 14.98 per cent."

In a report last Wednesday we warned that EU officials were quietly preparing for the possibility that Greece might be unable to meet its 450 million Euro debt obligation to the IMF due on April 9 and were studying cross-default provisions to brace for that potential outcome (see SGH 3/25/15, “Greece: Risk of Missing Debt Payment”).

Yesterday, Greece’s Interior Minister Nikos Voutsis warned of exactly that in an interview with Germany’s Der Spiegel online magazine, triggering a frenzy of analysis and coverage attempting to handicap the probabilities of such an eventuality.

*** At this time, however, we firmly believe that despite the threats and warnings, Greece will indeed meet its April 9 payment to the IMF. ***

*** From what we understand, recent measures to accelerate the payment of tax arrears through the offer of limited amnesty have resulted in some 400 million Euros of cash flowing into Greek treasury coffers over the last two weeks or so. That should help Athens not only pay its pension and public sector wage bills, but meet its IMF obligations as well, at least the upcoming bullet on April 9. ***

*** Furthermore, while the latest budget proposal submitted by Athens to the Euro Working Group contains a good dose of fluff and, as widely reported, falls short on some key labor and pension reforms, it also includes significant new measures that can and will be used as the basis for constructive negotiations over the next two weeks or so. ***

Pension, Labor Reform

On the pension reforms, the Tsipras administration adamantly refuses to raise the retirement age, but does appear ready to compromise on reforming the numerous and very expensive early retirement allowances provided in the Greek pension system. The refusal to hike the retirement age is, however, a political red herring, as it is the latter issue of early retirements that is seen to be most problematic, and the key focus of negotiations with the European Institutions.

Where Tsipras is less willing to compromise is on labor reform, specifically on provisions that would allow companies to lay off employees en masse as opposed to one by one, and on reforming union laws to restrict the ability of radical minority union quorums to call a strike. For all the compromises on other electoral platforms, there are, after all, limits to how far a Syriza government can go.

As far as the total budget numbers are concerned, the latest proposal claims to set Greece on the path to a 3.9% primary surplus for the year, instead of the 1.5% in the previous proposal that is what has widely been assumed to be acceptable to the EU. Those ambitious new numbers are submitted with the tacit understanding that EU officials, who were extremely skeptical of assumptions underlying the original figures, are very likely to adjust these down as well, to more realistic levels, at which point they just might hit the 1.5% surplus level.

The most significant revenue raising measure by far, and the most politically contentious concession provided by Athens in this budget, is the promise to maintain the extremely unpopular ENFIA property tax instituted by the previous Samaras government. This measure, as currently drafted, is estimated to raise a whopping 2.5 billion Euros in additional revenues.

“Equivalent” Measures

It is, however, political suicide for Syriza to implement the ENFIA exactly as had been agreed to between Samaras and the Troika – even Samaras and New Democracy officials were not comfortable with that agreement. Tsipras will therefore most probably submit a revised property tax proposal that will focus on larger properties. That, however, will likely fall 1 or even 1.5 billion Euros short of the more sweeping Samaras proposal.

EU leaders, including German Chancellor Angela Merkel, have nevertheless expressed a willingness to accept new measures that are “equivalent” to those contained in the old program. And so they will be agnostic to a revised tax – so long as it can be drafted and passed in a timely fashion, and the needed revenues can be found elsewhere.

The Euro Working Group will continue to liaise with Athens over the next two weeks at the deputy level, but will refuse to elevate Greece’s proposal to the Finance Minister level, much less to the thoroughly exasperated Heads of State, if and until most of the final hurdles have been surmounted.

Given that Greece is, despite what is now being widely reported, unlikely to run out of cash until we are told probably the end of April, the finance ministers and heads of state at present see no need to convene an emergency meeting before their scheduled meeting on April 24. They will in the meantime leave what will certainly continue to be contentious negotiations with Athens in the hands of the deputies and technical experts.

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