Greece: Still Not Enough

Published on May 19, 2015
SGH Insight
"The Greek proposals are unlikely to be sufficient to move the needle in the European capitals. Instead, clearer evidence of credible “redline” concessions and ratification by the Greek parliament is where the creditor demands are now leaning."
Market Validation
(Bloomberg 5/26/15) "Treasury 30-year bonds rose the most in more than a week as investors sought a refuge amid plunging stocks and as talks between Greece and its creditors foundered."

European Commission President Jean-Claude Juncker today denied reports he had intervened in negotiations with Athens with a compromise outline proposal to break the impasse between Athens and the Eurogroup. That was a wise denial, as the leaked “proposal” contained elements that we believe would be non-starters, not just for Germany but many other creditor nations as well.

*** A key element of the alleged compromise proposal was a partial disbursement in exchange for partial implementation of the existing memorandum of understanding, enshrined in the February 20 agreement. But we believe this would be unacceptable to Berlin, as would suggestions the IMF be excluded from a new program. ***

*** The unfortunate truth is at this point the deficit of trust between Athens and the EU is so high that creditors will not only demand concrete concessions to fill any fiscal gap that would exist in fulfilling existing obligations, they will also most likely require promises by Athens be ratified by the Greek Parliament before any further disbursements are made. ***

Climb-down from “Redlines” Needed

Right on cue, officials within the administration of Greek Prime Minister Alexis Tsipras latched on to the “Juncker Plan” leak to tout progress on measures that in fact have already been in the works for weeks, among them VAT tax reform, administrative tax reform, and privatizations (see SGH 5/8/15, “Greece: Some Progress, But No Relief”) – while deferring any negotiation on key pensions reform until sometime in the Autumn.

While that progress will certainly be welcomed, the Greek proposals are unlikely to be sufficient to move the needle in the European capitals. Instead, clearer evidence of credible “redline” concessions and ratification by the Greek parliament is where the creditor demands are now leaning.

It is in this light that statements from EU officials downplaying the prospect of a deal at this week’s Riga summit should be taken. The same goes for the renewed leaks from ECB officials assuring markets that a hypothetical missed payment to the IMF – perhaps the upcoming June 5 €300 million bullet repayment — would not automatically trigger a suspension of the Emergency Liquidity Assistance (ELA) lifeline to the Greek banking system.

Indeed, at this point, resentment against Athens is widespread within the EU, ranging from northern creditors to Spain, Italy, and Ireland, bristling over demands for reform carve-outs, and to the poorer Baltic States and Slovakia, indignant at Greek demands for special “humanitarian” dispensations.

These political dynamics will make parliamentary ratification of fresh funds for Greece extremely challenging unless there is a significant political climb-down from Tsipras on Syriza’s electoral platform and campaign promises and “redlines” – mainly on pension and labor reform. At this point, a referendum in Greece giving the Tsipras government a mandate to backtrack on campaign promises may be necessary not just for domestic Greek politics, but also as a necessary public signal of a climb-down to the constituencies of creditor countries.

Discussions are further complicated by the Tsipras government’s public refusal to admit it will seek a third bailout package, and its focus instead on debt restructuring as a means toward fiscal relief.

With the June 30 end date of the current program looming, and large bullet payments due in July and August, Finance Minister Yanis Varoufakis has revised proposals to “swap” the €27 billion of ECB debt to ultra-long term ESM financing.

Any such “swap,” were it to happen, would however in effect simply represent a new bailout by the EU fiscal authorities under another name, and would most certainly require another grueling round of fiscal negotiations.

What’s more, there are serious questions as to whether even that sort of relief would be nearly sufficient to set Greece on a sustainable path, with numbers already being floated of a minimum of around €50 billion in new debt relief needed – and that is assuming Greece’s condition does not continue to deteriorate further from here.

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