Was the Greek government right to call a snap Presidential election?

Open Europe's Raoul Ruparel asks this question over on his Forbes blog, concluding it was probably the correct political choice but that plenty of risks remain in the process. Full post below:

The news out of Greece has been improving slightly in the past few months in a welcome change from the trend of bleak economic and political news out of the struggling Eurozone state. However, the next few months could see the country reverting to trend somewhat.

Eurozone finance ministers agreed yesterday to allow Greece a technical extension of 2 months to its bailout which is due to finish at the end of this year. This is to allow the final quarterly review of the bailout to be completed – a necessary step to ensure the reforms are in place which in turn will allow for release of the final cash payment from the Eurozone.

Following the agreement, the Greek government announced that it will hold the first round of its Presidential election on 17 December, moving it up from February.

Together these announcements have crystallised some long standing economic and political risks for Greece going into the New Year. However, there are some key questions which spawn from these decisions and also some further risks which remain unanswered, I outline them below.

How does the Presidential election work and what is the likely outcome?

• The President (a largely ceremonial role) is elected by the Greek parliament. In the first or second round the candidate must gain 200 out of 300 votes from MPs. If this is not done then he needs 180 in the third round. If no candidate is found after three rounds, snap general elections are called (these would be around the end of January if they did happen).
• Currently the New Democracy and Pasok coalition holds 155 seats, while the opposition Syriza party has refused to back a joint candidate (a compromise often used in the past) since it is leading in the polls and wants snap elections.
• The government today announced former European Commissioner and Greek Foreign Minister Stavros Dimas as its candidate. 
• There is a chance that the government can gain the 180 seats – many of the smaller parties and independent candidates would lose seats to Syriza in a new election and therefore want to avoid having one. Currently, Greek officials put the chance of success at around 50:50 (not exactly inspiring but better than some had expected previously).

What questions still need to be answered?

• It remains unclear exactly how the extension of the bailout will play out. It is assumed the two sides will reach an agreement as before, with Greece eventually pushing through tough reforms. This is probable again but not guaranteed – the room for manoeuvre for the government is limited by the threat of elections. There is only so much they can do without harming their vote share further. Furthermore, the coalition partner Pasok is almost wiped out as a political force and therefore is scrambling for some way to boost its presence. This could lead to radical choices with an election looming.
• There has also been little progress on exactly how Greece will fund itself for next year. The Eurozone has said it is supportive of granting Greece an precautionary credit line – but this is complicated by a number of factors, not least that it is not very precautionary since it seems almost guaranteed that Greece will need to tap it.
• Furthermore, the involvement of the IMF remains unclear. Greece harbours significant resentment towards the IMF and wants to move away from their funding, even though they are still due to pay out another €9bn in 2015 and 2016. If they stay, they will need guarantees that Greece will be able to fund itself for 12 months, and if they leave their funding stream will need to be replaced.

Was the government right to move up the vote?

• It is a risky play, but I think it was probably the correct decision (at least from a political perspective). The key reason is that the uncertainty around what comes after the current bailout (which now ends in February) takes some power away from Syriza. The government has proven it can negotiate with the EU/IMF/ECB Troika and has a track record of managing crises. Syriza does not. As we have seen in Greece over the past few years, fear of uncertainty and possible increasing the chance of Grexit once again can be an important factor in peoples’ voting and thinking.
• Furthermore, the ideal position for Syriza is that a follow on programme would have been negotiated before the vote on the President and potential elections. This would have provided certainty and a platform which Syriza could try to negotiate a new bailout programme and a restructuring of Greece’s debt.
• One key question which remains unanswered is, what would happen if elections take place and Syriza win? While Syriza claim to support euro membership they want a fundamental change in the way Greece approaches European issues. Notably they want a debt restructuring and a complete overhaul of the programme for reforms and consolidation in Greece which accompanies the bailout (or presumably which would tie into a restructuring). This seems very unlikely to materialise, but it is not clear if they would push for a Greek exit from the euro if their demands are not met or if they would temper their position.
• All that being said, if this doesn’t pan out, then Greece will face elections early next year, in a climate of serious uncertainty with no clear plan to exit the bailout. Then again, this was always the risk and may always have materialised.

Overall, risks are coalescing in Greece once again. The fundamental questions over how to fund Greece in the medium term (as it economy tries to recover) or how it will continue to deal with incorrect interest rates and a too strong currency have never been answered. The government’s plan to move up the election is a risky one but politically probably the correct option. Ultimately, the next few months will be a bumpy ride for Greece, but the wider Eurozone should not be too affected since it has plenty of buffers in place to deal with such a crisis.

Upside down Europe

With politics heating up in the frigid Swedish winter we can’t help but get the sense that Europe is turning itself on its head a bit…

North becoming South?

• We warned yesterday that the Swedish government was on the brink of collapse. So it has proved. The Swedish Prime Minister Stefan Löfven today announced snap elections for the 22 March 2015 after the Swedish Parliament refused to back the government’s budget and instead voted for the opposition’s budget. This was largely down to the Sweden Democrats who are playing king-makers in the current parliament. Such political turmoil is alien to the usually placid Swedish political scene and rings more of happenings in struggling Eurozone countries unable to agree on an austerity budget in the midst of a severe economic crisis.

• Similarly, at the start of the year, the Danish coalition government was weakened by the departure of the Socialist People’s Party (SF) – which was not happy about the sale of part of state energy firm Dong to Goldman Sachs. However, the party said it would continue to support the government from the opposition benches. The move forced Prime Minister Helle Thorning-Schmidt into the seventh cabinet reshuffle since she took office in October 2011. The next general election is due in September 2015, and we wouldn’t be surprised to see the Danish People’s Party become the effective powerbroker – similar to the SD in Sweden – especially after they became the largest party at the European elections earlier this year.

• We have also noted numerous times (see here and here) that the Finnish economy is struggling and posting some of the worst growth figures in the EU. While it is stabilising now it is finding it hard to source new drivers of economic growth following the decline of Nokia, the tech sector more broadly and the paper industry. The long term economic malaise is surprising in a country which continuously ranks high in measures of competitiveness (4th globally according to the World Economic Forum) and ease of doing business (9th globally according to the World Bank).

South becoming North?

• In the third quarter of this year two of the strongest growing economies in the Eurozone were Spain and Greece. While countries such as Germany, the Netherlands and Belgium barely pulling themselves into positive growth territory the two periphery stalwarts posted some strong figures.

• Throughout this year we’ve also seen numerous periphery countries getting close to record low borrowing costs, including Ireland, Italy, Spain and Portugal.

• Discussion over the US-EU free trade deal TTIP have exposed some unusual fault lines. With countries such as Portugal and Italy pushing strongly for the deal to be struck and talking in very free trade terms, Germany and France have been raising concerns and taking a more protectionist stance.

Although thinking about it, we still have a looming economic and political crisis in Greece, economic malaise in Portugal and Italy and the rise of numerous populist parties. Maybe rather than the North and the South switching, the whole of Europe is just becoming more Southern…

Can the real Super Mario please stand up?

Former Italian Prime Minister Mario Monti may be out of Italian politics, but it's fair to say he still likes to talk - especially when travelling abroad.

In an interview with Belgian daily De Morgen and Dutch daily De Volkskrant, Monti seems to hint at what many Bundesbank-fearing Germans already suspected: that the ECB's pledge to do "whatever it takes" (i.e. the OMT, the new bond-buying scheme) was de facto grounded in a political decision - contrary to what the ECB's mandate dictates.

Here is what Monti said in the interview:

[At the June 2012 European Council], I have used my full negotiating position in order to get a line approved that looks boring at first glance. At 4 am, the signatures of all leaders had been provided, including the ones of [German Chancellor Angela] Merkel, of my good friend the Dutch Prime Minister Mark Rutte, and of Finnish Prime Minister Jyrki Katainen, you can say the monetary firepower from the North [...] The line established, in short, that eurozone countries who did their homework, like Italy, were guaranteed ECB support. That statement – at the highest political level – didn’t impress the markets, because the leaders did have the authority, but no money. One month later, ECB President Mario Draghi came out with his famous statement: the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. That did calm the markets, because Draghi did have the money. 

Monti is clearly trying to claim some credit - and the headline of the interview in De Volkskrant is actually "Mario Monti: the man who saved Europe". However, if Monti is right, it clearly means that the ECB's political independence was seriously compromised, since, strictly speaking, there should be no link whatsoever between a political agreement and ECB action..

Draghi's statement is one of the main reasons behind the fall in borrowing costs for countries in the eurozone periphery - some of which have yet to deliver on real economic reform. Monti may have given Draghi some of the credit - but he has also given fuel to those Germans who fear the ECB's independence is a thing of the past.

Greece exits the wilderness and returns to the markets

It has been labelled by some as the “amazing comeback”. Greece has this morning sold €3 billion of five-year bonds at an interest rate of 4.95% - and the demand exceeded €20 billion.

To be fair, the turnaround in investor sentiment with regards to Greek debt is pretty astonishing and the demand for the first Greek bond issue has outstripped even the most optimistic forecasts. As the newswires pointed out this morning, it increased quite significantly overnight:

But this outcome has left a few people scratching their heads and wondering what this means for Greece and the eurozone – both of which continue to struggle when judged on a broader set of data indicators. Below, we try to address some of these questions in a reader-friendly Q&A.

Why has demand been so strong?

There are a couple of reasons for this, and they have little to do with Greece.

• The bond auction remains small, and the yield fairly decent relative to other peripheral economies and 'junk' or high yield bonds of similar length. And there will always be investors looking for a better return. After all, even in the immediate aftermath of the Greek debt restructuring there were plenty of investors willing to take a punt on the newly formed bonds in the secondary market – and many of them ended up with good returns.
• This links to a broader problem in Europe, and even in developed economies – the shortage of safe assets and the lack of yield. Given the rock-bottom interest rates and dwindling inflation, the level of return available on many financial instruments is not what it used to be, and investors are keen to find new avenues to boost their gains.

But isn’t there a huge amount of risk involved?

Actually, given the structure of the deal and the environment involved, maybe not as much as one would expect (click on the graph to enlarge).

• Firstly, the bonds will be issued under English law. This will stop them being restructured in a similar fashion to the previous Greek bonds, meaning that the investors have significantly stronger legal protection.
• Secondly, the maturity of the debt is quite short, especially relative to the very long term (20+ years) maturity on the loans from the eurozone. This ensures that payment of these bonds falls well before Greece needs to start paying off its official loans – as the graph above highlights.
• Thirdly, the ECB’s promise to purchase government bonds if the crisis escalates again still stands. Furthermore, this has been combined with greater support from the eurozone for Greece and a new aversion to write downs of sovereign debt. 
• All of this means the likelihood of losses on Greek private sector debt has been significantly reduced. It has not been eliminated, but if any write-down were to be forthcoming it would most likely be losses on official sector loans, not least because they now make up 66% of Greek debt.

This has almost come out of nowhere in the past week or two: why such a rush?

• The first, obvious reason is Greece’s need for further funding. The issue of a funding gap this year and over the coming years (estimated to be around €20bn up to 2016) has been well covered. This bond issue, combined with some new fiscal measures and probably the leftover capital in the Greek bank bailout fund, will help fill most of that fiscal gap over the next couple of years. It also potentially paves the way for further debt issues.
• However, there are deeper political reasons. As shown by yesterday’s anti-austerity strikes, this morning's bombing outside the Bank of Greece and the dwindling majority of the government in parliament (which now stands at only two seats), there still is a significant amount of political uncertainty around. The government seems to harbour hopes that this return to the markets will galvanise its support, and act as a symbol of the turnaround it has helped to create.
• Furthermore, with the European elections around the corner and the opposition SYRIZA party looking set to do well, the government seems to believe that this issue could somewhat also boost their support at the polls.

But how much of a turnaround does this really signify for Greece?

While it’s certainly a positive, the macro level data for Greece remains worrying. As the charts below show (courtesy of Natixis), unemployment remains very high. In particular, youth and long-term unemployment are both stubbornly high, and threaten to become a drag on the economy in the longer term. While business activity has stopped its decline, the hope of a swift recovery is yet to be based on clear evidence. There is a long way to go in the structural reform programme, as highlighted by the 329 reforms recommended by the OECD.

More broadly, Greece’s long term strategy for competing and growing in the eurozone remains unclear, and it has zero room to absorb further economic shocks. Citi - forever bearish on Greece - took it upon themselves to be the buzzkill amongst all this optimisim with the chart below (via FT Alphaville). Ultimately, it remains a small symbolic step, especially given the size of the bond issue.

 Will Greece get to spend this money as it wishes?

That seems hopeful at best. While Greece may have a little more flexibility compared to when the funding comes from official loans, of which almost every penny is clearly assigned, there will be little wiggle room. As even those countries outside bailout programmes have found, the oversight at the eurozone level is now quite significant. Greece’s budget still has to be agreed in tandem with the EU/IMF/ECB Troika, and little flexibility is likely to be allowed, especially since there is already an outstanding funding gap which needs to be filled.

BILD up in arms about Greek bailouts once again

This is the front page of Germany’s (and Europe’s) largest  newspaper Bild. The headline reads:

“Greeks richer than us! ...But [the German] government plans new billions of aid.”

Now this is not exactly a surprising or rare occurrence – we have pointed out the tabloid's concern with the bailouts and other eurozone crisis actions before.

The story is based on the ECB wealth survey published last year. But as as we detailed on the blog at the time, the survey is actually quite misleading since it is based on old data and distorted by the much higher home ownership in peripheral Europe than in Germany. It also misses the point that tapping into such ‘wealth’ would be incredibly difficult.

In any case, with Greece continuing to struggle, even while the rest of the eurozone posts some positive results, the chances are that further assistance will be needed at some point. This remains a tricky proposition in Germany (and Greece, given the strings attached, we might add).

From the archives: The story of the 3% deficit limit

Okay, we know this is not exactly breaking news (the original story is from September 2012), but it came to our attention again and we felt compelled to post on it.

Back in the heyday of the eurozone crisis, Le Parisien interviewed Guy Abeille (see picture), a senior official at the French Finance Ministry who is thought to have 'invented' the 3% deficit-to-GDP limit later enshrined in the EU treaties and the cornerstone of the famed Stability and Growth Pact.

And Monsieur Abeille made some rather extraordinary revelations:

We came up with this number in less than an hour. It was born on the corner of a table, without any theoretical reflection.

It was a night of May 1981. Pierre Bilger, the Budget Director at the time, summoned us. He told us: [French President François] Mitterrand want us to provide him quickly with an easy rule, that sounds as coming from an economist, and can be opposed to the ministers that walk into his office asking for money.

We needed something simple...We were going towards FF 100bn deficit. That represented a deficit of over 2% [of GDP]. 1%? We dropped that number, impossible to achieve. 2%? That put us under too much pressure. 3%? It's a good number, a number that has gone through the ages, it made one think of the Trinity.

Mitterrand wanted a rule, we gave him one. 

In other words, it seems the deficit rule that has made so many politicians lose sleep, especially in the eurozone periphery, was cooked up in less time than it takes to roast a chicken and wasn't based on any economic theory or even best practice.

We also can't help but be reminded of the famed response of  a senior Anglo Irish Bank member when asked how he came up with the original bailout figure for the bank (which proved far too low) - I "picked it out of my a*se". Quite. And it seems he wasn't the first either.

Merkel's necklace aside, who won yesterday's German election debate?

Some 17 million Germans – and, we dare to say, a record number of keen international analysts - tuned in yesterday to watch the first and last televised debate between Angela Merkel and SPD contender Peer Steinbrück, ahead of the country’s elections on 22 September.

The debate only briefly touched on the Eurozone crisis and EU policy, with Steinbrück criticising Merkel’s policy over Greece in particular. Though some Anglo-Saxon commentators have written this up as the SPD candidate “criticising austerity” , in fact, he was more criticising the pace of austerity and its balance with more 'growth orientated' policies – not austerity itself.

As we've argued before, you just don’t criticise Sparpolitik in Germany – next to plagiarism, this is the best way to end a mainstream political career. Steinbrück did, however, criticise the pace and scale of Merkel’s austerity policies, again repeating his calls for an as yet very vague new “Marshal Plan” for Europe. “There must be budget consolidation”, he said, but must not be “a deadly dose”. Merkel hit back, saying that if, as Steinbrück claims, the need for a third Greek bailout is a sign of her Eurozone policies failing, why did he and his party vote in favour of all the bailouts so far?

So who won the debate?

The view in the German media and commentariat seems to be pretty unanimous that though the debate itself was pretty much a draw, it involved a bit of a boost for Steinbrück – which wasn't entirely unexpected, given that the man started from an exceptionally low base.

Germany: FGW poll: opinion of Merkel unchanged for 76% of viewers, 14% have a better opinion, 10% a worse one. Steinbrück: 47% 44% 9% #btw13
— electionista (@electionista) September 2, 2013

Snap post-debate polls also suggested a draw, with one putting Steinbrück in the lead (49% to 44%), and two others putting Merkel ahead (40% to 33% and 44% to 43% respectively). A fourth poll put both candidates on 50%.

However, Steinbrück did see a boost to his head-to-head ratings. An ARD poll (see below) has a massive swing in favour of Steinbrück on the question: who would you vote for if the Chancellor could be elected directly?















AnFG Wahlen poll for ZDF shows a much smaller swing for Steinbruck – but still a clear swing.

However, the real winner of the debate, according to many, was Merkel's fetching patriotic necklace, which has now has its own twitter account with over 6,000 followers.

The EU budget is a disaster that cannot save Greece

Our Director Mats Persson argues on his Telegraph blog:

Ever driven on a motorway in Spain or Portugal? You’ll notice it’s not exactly the M25 – often, cars are few and far in between (some pretty heavy congestion around Gibraltar not included).

According to some estimates, 25 per cent of the EU’s so-called regional funds in Portugal has been invested in roads, heavily contributing to a ridiculous situation where the country has 60 per cent more kilometres of motorway per inhabitant than Germany and four times more than Britain (H/T FT). Meanwhile, around one third of EU structural funds in Spain has been invested in infrastructure, further inflating an already critical construction bubble, while, like in Portugal, creating a whole host of ghost roads, airports and harbours. The EU’s own auditors have hammered EU spending on roads, noting that 74 per cent of the project they monitored in a recent investigation recorded less traffic than expected.

Welcome to the folly of the EU budget. This economic anomaly is at best irrelevant for the Eurozone crisis – at worst outright damaging.

Consider Greece. In the last week, there has been some talk of the EU budget being used in a third bailout for Greece. Although it’s not entirely clear how this could work – or how even how credible this speculation is – one way could be to reduce the amount of its own cash the Greek government needs to put up in order to unlock EU funds, known as co-financing. Depending on the circumstances, this usually ranges between 25% and 60% of a total grant. Greece currently has special permission to put up only five percent, and it wants this extended to the next EU budget period, to run between 2014 and 2020.

This is politically convenient since it draws from a cash allocation that has already been agreed (easier to sell to German taxpayers) while not coming with new, tough bailout conditions (easier to sell to Greek citizens). However, such an arrangement will also do absolutely nothing to save Greece:

• Most fundamentally, a quick look at the records shows that Greece has been allocated over €64bn in structural funds over the last two decades (to which the UK has contributed around 12%). Per capita, this is amongst the highest in the EU, yet the country is still bust and uncompetitive. 

• It follows therefore that it’s the wrong type of funding for Greece. It can’t be used for health spending, education or to recapitalise banks, for example, areas where the fiscal shortfall in Greece is / has been the most critical. It can, however, be spent on roads. 

• Like the structural funds in general, it risks creating an opportunity cost by diverting limited public investment away from where it can have the greatest impact. 

• Reducing the co-financing rate gets us away from the structural funds actually being a fiscal burden – Greece can’t afford putting up the matching cash (the structural funds tend to be oddly pro-cyclical). However, the trade-off is that it eliminates any form conditionality attached to the money. Is this really the way forward? 

• It’s a bureaucratic nightmare to get to the actual cash – exactly what Greece doesn't need. 

This also illustrates why (almost) the entire EU budget is pretty much a running disaster, in desperate need of root-and-branch reform.

Greece almost as worried about a third bailout as Germany...

As a follow up to our earlier post on the German reaction to the revelation of a third Greek bailout, we thought that it was also worth noting that there has been a fairly strong reaction in Greece as well.

As we suggested yesterday, the outrage over a third Greek bailout was unlikely to be confined to Germany, with the Greek themselves coming round to the cold realisation that this could mean many more years under tough bailout conditions. Many of the papers ran headlines expressing as much, with some including some rather ominous pictures of Schäuble…

“Schaueble is threatening us with new help.” (Sytakton, 21.08.13)

“Greece in German urns.” (Ta Nea, 21.08.13)

“Chains with new credit and saving programmes.” (Syriza, opposition party, 21.08.13)

How much more austerity Greece is willing and able to stomach will surely be a big factor in any discussion on future aid. The one saving grace may be that this bailout, whatever form it takes, is likely to be significantly smaller than the previous two, potentially allowing for more flexibility.

That said, as long as Greek debt continues to look inherently unsustainable any easing of conditions may be just a pipe dream. With both sides already expressing concerns over the project, expect another fiery set of negotiations towards the end of this year.

German parties scramble as third Greek bailout drops into the election campaign

The parties scramble on Greece in the election campaign

As we discussed yesterday, Germany has finally owned up to what everyone already knew – Greece needs more help. Not exactly ground breaking news some might say, but given that the German federal elections are 4 weeks away, the response in Germany has been frantic – providing a bit more insight into how each party views the eurozone crisis.

CDU
German Chancellor Angela Merkel said yesterday:

“I cannot say today what amount would possibly be needed…I cannot put forward a number, or confirm one. I don't know. One cannot know…We can only decide in the middle of next year." 

“I have to say I am a little surprised. Each Member of Parliament has all materials [relating to Greece.] And that, what [German Finance Minister Wolfgang] Schäuble said yesterday about Greece, everyone already knew that.”

Since Schäuble let the cat out of the bag a few days ago, the government, (via numerous politicians and spokespeople) has been tirelessly trying to display the comments as being in line with existing party policy. It has also tried to dispel the discussion altogether, suggesting no decision will be taken until mid-2014.

SPD
As expected in an election campaign, the opposition has jumped on the slip up. In an interview with Osnabrücker Zeitung, SPD Chancellor Candidate Peer Steinbrück said:

“I say clearly that saving Europe and the cohesion of the continent will cost something, also us Germans. It is time that Mrs Merkel tells that honestly to the people.”

In an interview with Handelsblatt, SPD Chairman Sigmar Gabriel said:

“[This] is the difference between the Chancellor and the SPD. Mrs Merkel says Germany will not go into a debt-union. In reality, the Chancellor has already long-organised such debt union secretly via the ECB. Mr Draghi has taken over state financing in the crisis states. But even before the election, the bill is going to arrive, in that Greece will guaranteed apply for another debt haircut.”

Former German Chancellor Gerhard Schröder also made his first foray into the election, telling a party rally:

“It is a big lie that Germany will not have to pay for Europe.”

For all the SPD's attempts to push the CDU into admitting that the eurozone will need further aid, it still isn’t entirely clear what the SPD sees as the solution to the eurozone crisis. This has hampered its attempts to take advantage of the situation. It’s also telling that interventions by SPD party 'big beasts' seem to make Chancellor candidate Steinbrück look timid and uninspiring -- rather than helping him.

CSU
The Bavarian sister party of the CDU has been notoriously pessimistic over the eurozone crisis and is, expectedly, none too happy about the timing and the substance of the admission that Greece needs more aid.

CSU leader and President of Barvaria, Horst Seehofer said that a new aid package for Greece "is not in question," and that he is "not very happy," with the current discussion. Meanwhile, Bavarian Finance Minister Markus Soeder warned that:

“It was completely wrong to announce a third programme [for Greece] now.”

ECB
The ECB has offered veiled support to the German government. ECB Executive Board member Jörg Asmussen, who was visiting Athens yesterday, said that the plan remained to assess Greece’s situation once it registers an annual primary budget surplus -- likely at the end of this year.

Meanwhile, Bundesbank President Jens Weidmann commented that, “Nobody here [in Germany] longs for the D-Mark…We are fighting for a stable euro,” playing down fears this could revive talk of a eurozone break up.

Other parties have weighed in as well, with Alternative für Deutschland and Die Linke slamming the prospect of any further bailouts as expected. This incident could potentially help increase their share of the vote, although it may well come at the expense of the junior coalition partner, the FDP, which has been fairly quiet throughout this episode – that of course could make creating a governing coalition a bit trickier.

Despite the CDU's attempts then, this issue seems here to stay, although it is unlikely to have a significant bearing on the outcome of the election.

That said, it doesn't paint a rosy picture for the German approach to the eurozone crisis after the election. Those expecting huge change are likely to be dissapointed. Another bailout simply suggests more of the same. Meanwhile, all parties seem short of any real policies for how to change the current approach and/or find a real solution to the eurozone's economic woes.

Germany finally admits to a third Greek bailout, but what form might it take?

It seems the German government has finally publicly accepted what everyone already knew – that Greece will need some kind of further financial assistance after its second bailout programme expires at the end of 2014. German Finance Minister Wolfgang Schäuble told a CDU election rally yesterday:

"There will have to be another [bailout] programme in Greece," in order to help the country "get over the hill" of debt repayments it faces.

Despite attempts from both the German Chancellor Angela Merkel and German finance ministry spokesmen to row back from the comments and suggest they are not, in fact, a change in stance, the remarks seem to have stuck.

What form might the third bailout package take?

• According to the IMF, Greece's total funding gap up to the end of 2015 is around €11.1 billion (5.8% of GDP) – so this can be taken as a lower bound of the funding needed. Privatisation receipts (which have notoriously fallen short) are expected to reach €7.7 billion over the next three years. Further shortfalls here could push up funding needs.

• A further extension of maturities and reduction in interest rates on the official sector loans, as suggested by EU Economic and Monetary Affairs Commissioner Olli Rehn also seems likely. However, interest on loans from the EFSF - the eurozone's temporary bailout fund - are already at cost and payments have been deferred for ten years. The IMF is also unlikely to reduce its interest rate as this would amount to a form of debt restructuring, which the IMF refuses to engage in due to being the most senior creditor. This leaves only the eurozone's bilateral loans from the first Greek bailout, the interest on which has already been reduced to around 1.5% (well below most eurozone states' long-term borrowing costs). Therefore, scope for further reduction is limited, and the benefit it could provide would amount, at most, to a couple of billion spread over a long period, as we have previously noted.

• Another widely touted proposal is to use the leftover funds originally allocated for Greek bank recapitalisation. So far, according to the IMF, Greek banks have received €40.9 billion out of an allocated €50 billion. Although it seems the EFSF expects this to increase to around €48.2 billion. It is likely some additional buffer will be needed, given the pace of increase in bad loans in Greece, meaning the amount available is likely to be between €2bn and €4bn max.

• A final idea, reported by Süddeutsche Zeitung, is that EU structural funds could be able to provide some of this funding. It’s not clear exactly how this would happen and, as we’ve noted before, we're sceptical of the idea that there is lots of excess money floating around to be easily reallocated in the EU's structural fund programme. Given that the new EU budget headlines for 2014-2020 are set, it's not clear how much more money can be squeezed out for Greece. One option would be to adjust the 'co-financing rate' (the amount the Greek government contributes to each project to gain funding) but this has already been adjusted and provided little boost to the take up of funds, which remains well below target.

Lots of questions to be answered then about the size and format of what may be the trickiest Greek bailout to date, given the tough political constraints and the on-going (very tenuous) premise of debt sustainability. An important consideration, as Schäuble suggested, will be to get Greece over its funding hump in the next couple of years (data from Greek debt bulletins):

The final point to note is the continuing German aversion to further debt relief for Greece, something the IMF and nearly all private observers accept is necessary. Within Germany, this seems to be a result of the government 'learning its lesson' from the first Greek debt restructuring, which patently failed. However, the German government seems to be learning the wrong lesson for the wrong reasons – it was not that restructuring was a bad idea in itself, but simply that all such a large amount of debt was held by Greek banks that the ensuing recapitalisation and bailout negated any benefit.

The German government clearly remains loathe to discuss any such details, meaning a clear plan is unlikely to emerge until the end of the year. In the meantime, we can’t help but wonder how the Greek public will react to the prospect of another bailout with another set of conditions attached. Could the big unknown outside the eurozone begin to look attractive once again? Maybe, or maybe not - but it may well start to factor into their thinking at some point.

Greece appeals to Russia over natural gas prices

As we reported in today’s press summary, there were some interesting reports circulating in the Greek press this morning about Greek Prime Minister Antonis Samaras sending a letter to Russian President Vladimir Putin to request assistance with cost of Greek gas – namely the gas which Greece imports via Gazprom.

Looking at the data it’s clear why the Greek government is concerned about this:

As the graph shows, in the second half last year, Greek gas prices were the highest in the EU not including taxes and third highest including taxes. This is very problematic for Greece for a few reasons:

• Obviously in the depth of a deep recession very high energy prices can act as a significant drag on the economy (both on supply as it impacts business and consumption as it eats into the spending power of consumers).
• Greece is completely reliant on imports for much of its energy supply, particularly gas and oil. This makes it vulnerable to future price shocks and gives it little control. Incidentally it also makes its current account adjustment (moving to a surplus) more difficult since it has an almost permanent deficit from energy imports.
• Surprisingly, Greece has so far managed to keep fairly low electricity prices. This is positive for consumers but problematic for the producers facing very low margins. Usually, this might be an easy problem to balance out, however, with the government looking privatise the sector it makes investment look much less appealing. Partly in response to this, the government has allowed prices to be pushed up further squeezing the standard of living.

Even though the request may be understandable then, it treads on unsteady ground for the EU. 

As we noted during the Cypriot crisis, Russian influence in the region (particularly in relation to energy) is a very dicey issue, which brings out conflicting goals in various EU member states.

Natural Gas Europe reported last week that negotiations between Gazprom and Greece have been on-going for some time but are at somewhat of an impasse with the former offering price reductions of around 10% and the latter requesting up to 20%.

Any favour on gas prices from Gazprom (via Putin) is unlikely to come for free. The EU (and the US for that matter) will likely be mindful of ceding further influence over an EU member to Russia, especially one in as strategically important position as Greece. Gazprom has also widely been mooted as the likely buyer of DEPA, the Greek gas monopoly which is being privatised, although it did refrain from bidding earlier this year. Still the prospect for increasing Russian presence in Greece and the Greek energy market is clear, while hope of Greece tapping into 'vast' reserves under the Mediterranean are still a pipe dream to a large extent.

All that said, its clearly early days and we shouldn't get ahead of ourselves. But we’re certain other EU leaders will be watching this one closely.

IMF takes a more critical line on Greece

The IMF  released its latest review of the Greek bailout on Wednesday. As might be expected it was a bit more critical than the version released by the European Commission and ECB a couple of days ago.

As also might be expected the press has focused on the fact that the report reveals an €11bn funding gap for Greece between 2014 and 2016 (higher than that suggested by the eurozone). The report also calls for the eurozone to consider further debt relief for Greece. Neither of these revelations is brand new, with both having been included in the leaked version of the Troika report a few weeks ago.

There are a couple of other interesting points in the 207 page report, including some concrete forecasts on the shares of Greek debt.

These amounts are pretty much as we predicted back in March 2012, where we forecast that by 2015 around 76% of Greek debt could be held by the IMF and eurozone (NB – it’s not clear how the ECB and national central banks holdings of debt [circa €40bn] are classified in the IMF figures. If they fall under private sector here, then the holdings by official creditors may well be higher in reality).

In any case, these amounts drive home that the real question facing Greece and the eurozone (after the German elections) is whether to write down these ‘official creditors’ or not – known as ‘official sector involvement’ (OSI). There will likely be a push to extend the loans further and cut their interest rates but, as the funding gap highlights, there are immediate liquidity and solvency questions facing Greece.

Other interesting points in the report include:

• The IMF warning of further social unrest: “The risk of political instability remains acute, especially in light of high unemployment and on-going social hardship. Further ambitious fiscal adjustment is needed for public sector debt to decline steadily, which exacerbates the possibility of social stress and political resistance.”

• Arrears clearance seems to be behind schedule with only €1.4bn of the targeted €4.5bn being paid off. However, Kathimerini reports that this has now been increased to €4bn according to Greek government data.

• Greece only just manages to quality for IMF assistance, with the IMF saying, “The program continues to satisfy the substantive criteria for exceptional access but with little to no margin.” The explanation involves a few stretches on the debt sustainability front, with the fund arguing, “The risk of international systemic spill overs in case of a permanent interruption of the program remains high and justifies exceptional access.” This raises an interesting question of whether, with the OMT and talk of a eurozone turnaround, the spill over effects are still significant enough to justify such IMF action?

• The comments by Paulo Nogueira Batista, the Latin American representative on the IMF board, who slammed the overly optimistic assumptions in the debt sustainability analysis and suggested the programme was flawed. He has since backtracked from his comments, while the Brazilian government has issued its support for the bailout programme. Nevertheless, the outburst is a timely reminder of the on-going disputes behind the scenes in the IMF, between the US/Europe and the emerging market countries.

The new Eurobarometer is out. Here's what you won't find in the European Commission's press release

The latest Eurobarometer is out, and as per tradition, the European Commission does its best to spin the findings of a survey that, particularly since the eurozone crisis broke out, hardly makes for happy reading.

The press release accompanying the latest Eurobarometer carries the headline, "A greater dose of optimism", which is justified by the fact that "those saying they are optimistic about the EU's future outnumber those who say they are pessimistic in 19 out of 28 countries".

Now, here are a couple of findings from the same survey that you won't find in the European Commission's press release (but are available here):

• The number of those who "tend not to trust" the EU is again at 60% - a +3% increase from the previous survey. The total figure includes 83% of Cypriots (+19% from the previous survey), 80% of Greeks (-1%), 75% of Spaniards (+3%) and 71% of Portuguese (+13%). To be fair, the level of confidence in national governments/parliaments in these countries is even lower - but that shouldn't be of great consolation.

• On the question "do you feel a citizen of the EU?", a majority (62%) of respondents agree, although in three countries more people disagreed than agreed with this statement. That this includes the UK may not be a big surprise, but that Greece and Cyprus are on there as well shows how badly the crisis management has tarnished the EU's reputation.

• A relative majority of Europeans have a neutral image of the EU (39%, =), and the proportion of respondents for whom it conjures up a positive image continues to be just higher than the proportion for whom it is negative (30% positive, unchanged; 29% negative, unchanged). Again, in Greece, Cyprus, Spain and Portugal a majority (sometimes relative, sometimes absolute) of respondents have "a negative image" of the EU.

• Two-thirds of Europeans say that their voice does not count in the EU (67%), a 3-point increase taking this score to its highest level since autumn 2004 when the question was first asked. This proportion has increased almost continuously since spring 2009, from 53%. Only just over a quarter of respondents (28%, -3) agree that their voice counts in the EU.

• 49% of total respondents don't think the EU "makes the quality of life better in Europe", compared with 43% who think it does.

• On the euro, public opinion is hugely divided with only a 9% net approval rating - 51%, support it and 42% oppose it. In countries that are euro members approval stands at 62% (down 4% since Autumn 2012) but only at 29% in non-euro countries. 

Athens strikes another bargain in Brussels, but how long will this one last?

As we noted last week on CNBC, a deal was always likely this time round in Greece:

"We've got German elections coming up in September and no one wants to have that talk of how we're going to fund Greece for the next three or four years. So they just want to kick the can down the road until after the elections…They will come to some agreement but it's clear that Greece is well behind track on its programme once again and it's only a matter of time before a new funding gap opens there."

One was eventually reached yesterday morning with details filtering out overnight.

How much will be disbursed and when?

• The eurozone will provide €2.5bn this month and €500m in October, while eurozone central banks will provide €1.5bn and €500m at the same time by releasing profits from their holdings of Greek government bonds. This should give Greece enough cash to cover costs and payoff the €2.2bn of government debt maturing in August.
• The IMF will hold a meeting later this month where it is expected to agree to release its next €1.8bn share of the bailout.
• The staggered pay-out of this €6.8bn will allow the eurozone to enforce more conditionality, meaning it could delay the future tranches if Greece does not stick to its reform programme.
• Once this round of funding is complete, Greece will have received around €208bn out of a total €246bn committed.

What does Greece need to do?

• The bargain comes with strict conditions on Greece (as always), particularly in terms of civil servant cuts on which Greece seems to have fallen far behind. Greece must put 12,500 civil servants in the labour mobility scheme within the next few weeks (where they receive reduced pay and are sacked within a year if they do not find a new position).
• This must be doubled by the end of the year, while 15,000 must be laid off by the end of 2014.
• Greece must also work to step up reform of the tax system, tackling evasion and improving collection of back taxes. This is obviously easier said than done and has been a target from the beginning, no details yet as to how this time round will be any different.
• Must close the funding gap in the healthcare provider EOPYY which totals around €1bn. Again no details as to how and when exactly this will be closed.

Unanswered questions

• On top of the ones hinted at above, the key unanswered question remains, how will Greece fund itself once the bailout runs out? The eurozone has already further committed to €11bn in aid (unlikely to be in the form of direct funds) in 2014 and 2015 although it is yet to identify where this will come from. Eurogroup head Jeroen Dijsselbloem dismissed such concerns saying, "If there is a financing gap it will be at the end of 2014, which will allow us plenty of time to deal with it," which provides little comfort given the delays in dealing with other eurozone problems.
• Can the government actually push through all these measures with its slim majority? We expect it will probably be able to (just), but it will be the first real test for the new coalition and will provide a good bellwether of how it will fair in the coming months.
• What is happening to the closed state broadcaster ERT? This remains unclear. This is important not just for political reasons (still has the potential to expose divisions in the coalition) but also since the 2,600 employees could provide a big boost towards meeting the targets for civil servant cuts (the real reason behind the closure in the first place we suspect).
• Another key aspect of the recent funding gap was the reluctance of national central banks to rollover their holdings of Greek bonds (thereby reducing the amount Greece has to pay off). It’s not clear whether this has been done or will be done, although comments from officials this morning suggest it may not yet be finalised.

Another bargain very much along the usual lines of cash-for-reforms. Questions over Greece still loom large, it is not clear that they will be able to push through these public sector reforms having failed many times before. Given the lukewarm comments from the Troika it seems that even they expect another funding gap to open soon. Meanwhile as the end of the bailout approaches the fundamental issue which the eurozone has been avoiding for some time – how to fund Greece for the next decade – will need to be dealt with.

Coalition row over public broadcaster gets nastier by the day in Greece

Ten days ago, we wrote a blog asking, "Will the closure of the public broadcaster set the scene for a coalition showdown in Greece?" Yes, it has. And it's looking nastier by the day.

Greek coalition leaders met for the third time this week yesterday, but failed once again to strike a deal on the future of the country's public broadcaster ERT. This despite Prime Minister Antonis Samaras offering to re-hire as many as 2,000 old employees to resume broadcasting. Democratic Left, one of Samaras's junior coalition partners, could pull out of government as early as today.

This would leave the government with a wafer-thin majority of 153 seats out of 300 in the Greek parliament, although Samaras could try to win support from some of the 14 non-attached MPs on a case-by-case basis. Not ideal only one year after the coalition was formed, although it could avoid the prospect of snap elections.

Democratic Left MPs are currently in talks with the party's leader, Fotis Kouvelis, to make a decision. An announcement is expected shortly.

How did the problems escalate to this point?

Although the closure of ERT instantly flared up coalition tensions, it does seem surprising that the Prime Minister's party New Democracy (ND) has allowed it to get to this point - where a coalition split is a real possibility. On the surface, it seems it would be simpler for ND to give in and re-open ERT at least temporarily (that is after all what even the Greek Council of State suggested). However, this misses the confluence of problems which the Greek government is currently facing:

• The government is falling well behind on the sacking of civil servants and the necessary savings this delivers. It has agreed to dismiss 4,000 public sector workers by the end of this year and put a further 25,000 into the labour reserve (where they receive a reduced salary). Closing ERT instantly delivers up to 2,600 layoffs - though part of old ERT employees would presumably be hired once the revamped broadcaster is created. The EU/IMF/ECB Troika is ramping up the pressure for clear evidence that these promises will be fulfilled.

• The privatisations programme, due to raise €2.6bn this year, is clearly off track. This is mostly due to the failure to sell the natural gas monopoly DEPA. This funding gap must be filled from within the government's existing budget - and no concrete plans have been put forward so far.

• A further €1bn financing gap has opened up in the National Healthcare Provision Organisation (EOPYY), while the Troika remains unconvinced of plans for a new property tax which was forecast by Greece to boost revenue.

• Furthermore, the IMF could suspend the payout of the next tranche of Greek bailout funds due next month unless eurozone leaders plug a €3bn-€4bn shortfall in the country's rescue package. Compared to the internal funding gaps above, this is an external one which has arisen due to euro area national central banks refusing to roll over their holdings of Greek bonds as had been agreed under the last revision of the Greek bailout (as we reported in yesterday's press summary). Eurogroup Chairman Jeroen Dijsselbloem moved quickly to deny the reports, adding that "the [Greek] programme is fully financed for at least another year."

Therefore, the sum of these factors has escalated the ERT issue into one which could potentially undermine the coalition. The opening up of a new financing gap is hardly surprising, and is actually something we predicted at the start of this year.

As noted above, if the Democratic Left exited the coalition, the Greek government would still hold a majority in parliament, albeit a wafer thin one. Support from the Democratic Left on certain issues could be expected, but would of course no longer be guaranteed.

The Greek government is likely to face some very tough decisions in the near future. An erosion of its power now could make pushing these decisions through significantly more difficult.

The show(down) must go on: Coalition row over closure of Greece's public broadcaster continues

Last week, we noted on this blog that the abrupt closure of Greece's public broadcaster ERT risked opening a rift in Greece's ruling coalition - as Prime Minister Antonis Samaras took the decision without the approval of his junior coalition partners, PASOK and Democratic Left.

Tensions have actually mounted within the coalition, and all eyes are now on a meeting later on today between Samaras, Evangelos Venizelos and Fotis Kouvelis (the leaders of PASOK and Democratic Left respectively). Here's a quick update of what happened over the weekend:

• After both PASOK and Democratic Left hinted at snap elections as a possible outcome of the on-going coalition row over ERT, Samaras came up with a compromise proposal: have a cross-party committee hire a small number of workers so that a basic broadcast service (mainly news bulletins) could resume as soon as possible;

• Samaras's coalition partners have both turned the offer down. They concede ERT needs restructuring, but want the state broadcaster to stay open while such a restructuring takes place;

• This makes today's meeting (scheduled for 5.30pm GMT) very interesting. Venizelos and Kouvelis are apparently not planning to make doorstep statements after the meeting with Samaras, but will wait to speak until they are back at their respective party headquarters - possibly another sign that tensions are running high;   

• German Chancellor Angela Merkel yesterday spoke to Samaras over the phone and reminded him that "it is of vital importance" for Greece to stick to all its commitments with the EU-IMF-ECB Troika, including "those relating to public sector reform." Just a coincidence? Or an invite to Samaras to stick to his guns on ERT closure? 

• Meanwhile, Alexis Tsipras, the leader of the largest opposition party, SYRIZA, is to deliver a speech in Syntagma Square this evening - right in front of the Greek parliament. No doubt he will use it to call for the government to resign.

• Finally, it's worth keeping in mind that ERT workers have appealed to the Council of State - Greece's highest administrative court. The Council of State should issue its verdict later on today, and many expect it to order that ERT be immediately re-opened. Paradoxically, the ruling could help put an end to the coalition row. However, it would almost inevitably also weaken Samaras's position - given that his initial decision to shut down ERT would be overturned.  

We will keep a close eye on any future developments, so make sure you follow us on Twitter @OpenEurope if you want to stay on top of the latest events in Greece.   

Will the closure of public broadcaster set the scene for a coalition showdown in Greece?

Imagine a Number 10 spokesperson announcing during the afternoon news bulletin that the BBC has become too expensive to run and will be shut down with immediate effect. You would be excused for thinking that the Government and the Corporation have joined efforts to take you for a ride.

Well, this is exactly what happened in Greece - and it wasn't a joke. Greek government spokesman Simos Kedikoglou went on TV yesterday afternoon to say that the country's public broadcaster ERT would go off the air a few hours later, because it had become a "refuge of poor transparency and waste."

As a result, ERT's almost 3,000 employees have been temporarily laid off. The Greek government says that a revamped and slimmed-down broadcaster (NERIT SA) will be up and running by the end of August. Protests were staged outside ERT's headquarters yesterday and are continuing today, while ERT journalists are still putting programmes on air via digital frequencies and the internet.

A couple of points are worth making at this stage:

• The decision to shut down ERT is clearly linked to Greece's commitment to firing 15,000 public sector workers by the end of next year under its EU-IMF bailout deal, although it's up to the Greek government to choose where to cut. Therefore, it's probably not entirely fair to blame the Troika for this (admittedly pretty extraordinary) decision;

• The fact that the Greek government prefers shutting down ERT altogether and then opening a brand-new company, instead of trimming the existing company down, could be seen as further evidence of how difficult it is to fire public sector workers in Greece - even in cases where inefficiency and waste are evident (at least according to what the Greek government spokesman said);

• On the domestic politics front, Greek Prime Minister Antonis Samaras has decided to go ahead with the closure of ERT despite open opposition from his coalition partners - PASOK and Democratic Left. The latter now want to submit a draft bill to scrap the decision, meaning that there is a risk of a coalition split - unless someone blinks.  

As the Troika has long suggested, it is clear that Greece's bloated public sector needs to be downsized significantly. That said, it is also clear that this situation has been poorly handled, particularly given the wider political and social tensions already at play in the country. The fallout of this story might be worrying - further splits in the governing coalition and wider public backlash against an austerity programme for which there is already very little buy-in.

We will keep monitoring the situation and give further updates on Twitter @OpenEurope.

The march of eurozone unemployment continues

An unstoppable march? Maybe. The consistent monthly practice of smashing unemployment records in the eurozone continued in April with the overall total reaching 12.2% while youth unemployment hit a whopping 24.4%.

• As the graph highlights (click to enlarge) youth unemployment has risen a staggering amount in some countries since the start of the crisis (for countries where April data is not yet available the latest month available was used).
• The problems in Greece are well documented but some very large economies also have some very serious problems with youth unemployment. In April it stood at 56.4% in Spain, 42.5% in Portugal and 40.5% Italy.
• The longer this goes on the more problems it will cause both economically and socially. It creates a split within society with many young people seeing a very bleak future; traditionally this has also fed populism and the rise of extreme political parties.
• Economically it hurts the long term productive potential of the economy as some of these young people see their productivity reduced by long stints out of work, while many others will look for work abroad potentially creating a 'brain drain' and worsening an already troubling demographic problems.

Public support for the EU drops by 16% in one month: is popular support for the euro in Greece finally about to wane?

As we've noted in the past, a factor that will determine whether the eurozone can hang together in the long term is the extent to which the public in the South begins to see the euro and EU austerity as synonymous.

For example, despite everything that has taken place in Greece, this has not been the case, with a majority of Greeks consistently in favour of remaining inside the euro. The choice is instead perceived as being between austerity or some form of alternative. This is why we rightly predicted that Greece would remain inside the euro following its hectic dual elections last year (at a point when many analysts were predicting an imminent Grexit).

But is this now starting to change? 

Possibly.

A new Public Issue poll shows that 66% of Greeks now have a "negative opinion" about the EU. For a country that has traditionally has been staunchly pro-EU, that's bad enough. But extraordinarily, when the same question was asked only a month ago, 'only' 50% of respondents said that had a negative opinion  about the EU- a massive 16% increase in only a month, possibly owing to the handling of the Cypriot bailout and the renewed Troika push for civil service cuts in Greece. Those with a positive view dropped from 48% to 31% in the same space (see the graph below).

A separate poll by Marc for Alpha TV asked the question, “In case it’s not possible to improve the conditions of the loan agreement, what do you think we should do?” 53.8% answered "remain in the EU and the euro", while 41.3% said they wanted to "leave the EU and return to the drachma" (4.9% don't know). Note that this was a question about leaving the EU, not only the eurozone. Whilst still a majority in favour of sticking around, to our knowledge, there has been no Greek opinion poll to date with such a large share in favour of leaving the euro and the EU.

Incidentally, the Public Issue poll also asked who respondents wanted to see as Prime Minister. Top candidate? “None”. (see graph)

We're not drawing any firm conclusion from this, although if this trend continues it will be significant. Currently a majority of Greeks believe that things "would be worse" outside the euro. It's worth listening to our interview with leading German economist Hans-Werner Sinn, which we published today, on the prospects for Greece in the euro. One thing is clear: this won't be easy.