Negotiations between the EU and Greece over the weekend that led to a four-month extension of the Troika bailout program, now called “Arrangements with the European Institutions,” were marred by high levels of frustration and distrust among EU officials towards the newly elected government of Alexis Tsipras, and most especially, his bombastic Finance Minister, Yanis Varoufakis.
Indeed, when all is said and done, EU officials have rejected all attempts by Athens to secure any interim funding during that “extension,” which begs the question of what, if anything indeed, was “extended” on Monday beyond a stay of execution from the ECB while negotiations continue.
ECB Governor and Austrian National Bank President Ewald Nowotny hinted before the weekend discussions that under the right circumstances the ECB could consider restoring the exemption that allowed the ECB to take the below investment grade Greek sovereign debt as collateral, which was cancelled on February 4. And Greek officials today re-stated their hopes the ECB consider that at its next Monetary Policy meeting.
*** But our understanding is that Greece’s collateral exemption almost certainly won’t be restored at the upcoming Governing Council meeting on March 5. That exemption is only allowed if and while a country is deemed to be abiding by EU program rules, and it seems extremely unlikely there will be sufficient assurances by then that Greece meets that hurdle. ***
*** Indeed, there is a good chance the collateral exemption may not be restored until after the end of April deadline for the submission by Athens to the European Institutions for more details on its budget proposals, and it may not be restored for the entire tenure of the four month extension deadline for coming to a formal new agreement on long term funding for Greece. ***
*** In the meantime, despite continued hopes and calls from Athens for additional financial support from its Eurozone partners, the Tsipras administration will be left to fund its government through Greece’s shrinking cash reserves, drawing down on its primary budget balance, and some more creative financial engineering. ***
Keeping Tsipras on a Tight Leash
When it comes to servicing debt Athens has agreed to, and the IMF will insist on, the repayment of its 2 billion euros equivalent of SDR denominated bonds that come due between now and the end of April interim deadline. Repayment may also be expected on the 2.5 billion euros equivalent that will come due between that and the end of the four month extension period, assuming negotiations continue to drag on.
If Athens needs to raise additional money to meet those redemptions, it can theoretically issue T-Bills, as it has been suggested. But those would need to be purchased by outside, most probably foreign investors, and not the Greek banks, which means it would come at a high cost in the yield level demanded, if possible at all.
There has been some confusion and ambiguity throughout these discussions over whether the EU and ECB’s Single Supervisory Mechanism, through its regulatory control over Greek banks, would allow Greek banks to increase their purchases of T-bills above and beyond the currently allocated cap levels as repeatedly requested by Athens.
We do not think they will or can allow that, again, until a new agreement in place. Greece will therefore have to keep a keen eye to maintaining the confidence of private investors in the meantime if it is to go down that route.
Hence there are reports today that in order to raise funds, the Greek government may look for an alternative and presumably cheaper option of “asking” fifteen pension and insurance funds, instead of the banks that fall under the regulatory purview of the ECB, to conduct “internal repos” with its Public Debt Management Agency and Labor Ministry.
There are plenty of global precedents for desperate governments raiding pension funds in order to fill financing gaps, but this is a limited avenue for Greece.
Reports out of Athens suggest the coffers of the fifteen pension and insurance funds targeted by the Greek government are already running thin, by now left with little more than 3 billion euros worth of liquid assets, and 11 billion euros of assets in total.
The EU game plan is, in effect, deliberately to leave Athens scrambling to fund itself on its own as Tsipras puts together what will certainly be a plan that is domestically controversial. And the pressure of the upcoming redemption schedule is expected keep the heat on Tsipras to deliver.
Funds Left in Limbo
Indeed you will recall the desire to keep this heat on Athens, and the pressure of the almost 7 billion Euros of additional ECB bond redemptions due in July and August, was the very reason we had heard Germany and other member states were loath all along to agree to any extension beyond four months despite reports in the press of a six month deal (See SGH 2/13/2015, “Greece: Structuring and Selling a Marginal Deal”).
And a four month stay was all that was granted, with the promise of some funding held in limbo.
Greek officials have repeatedly requested the EU disburse an estimated 1.9 billion euros of “profits” from Greek bond purchases by the ECB under the SMP (Securities Market Program) being held on National Central Banks’ balance sheets.
The ECB has deferred the decision over the disbursement of those funds to the fiscal authorities, but the EU will continue to hold out on releasing those funds only upon the successful conclusion of at least the current agreement.
Likewise the Greek government has demanded the now slightly less than 11 billion euro balance of unused EFSF funds provided to secure the stability of the Greek banking system be made available to Athens as funding over the “bridge” period. But that also has been rejected.
In fact, Athens rather embarrassingly has had to agree to physically transfer those funds from the Hellenic Financial Stability Fund back to the EFSF, which will hold it in reserve, only to be used for its original purpose, in the extreme case it is needed to stem another run on the Greek banking system.
Any money or indeed any financial leeway to be provided to Athens by the “European Institutions” continues to be effectively predicated on a successful conclusion of the terms of the original “agreement” and its replacement with a plan by Athens of “at least equal if not stronger” credibility than the original commitments.
We are sure that when push comes to shove, “close enough” will be fine. But in the meantime, the onus will continue to fall on Tsipras to regain the trust of the EU.
The lack of any hard new financial commitment will at least make passage of what is the fairly hollow weekend extension deal through German and other nations’ parliaments that much more easy.