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Monday, February 06, 2012

The Greek end-game?

Greece is on a "knife edge". That was how Greek Finance Minister Evangelos Venizelos put it on Saturday ahead of emergency talks between Greek political parties and the EU/IMF/ECB troika (with eurozone countries and private sector bondholders thrown in there somewhere as well).

We're sure you're thinking - surely, we've heard this all before? That may be the case, but unfortunately this time may be different. For once, Greece has a hard and fast deadline to meet to avoid a disorderly default.

But lets back up a second, whats the current disagreement between the Greek government and its creditors all about? Well, despite seemingly getting talks with the private sector bondholders pretty much finalised, new gaps between the Commission/ECB/IMF troika and Greece have opened up over the second bailout (as we predicted in our previous posts). The main areas of contention (as expected) seem to be the desire for eurozone countries to see greater wage and spending cuts. However, the three party coalition which underpins the 'technocratic' government of Lucas Papademos is refusing to back greater austerity - they simply believe their parties and the public won't support it. They may well be right but they may also have one eye on upcoming elections (as has been suggested). All of this puts the eurozone at yet another impasse. There is no way eurozone states will agree to disburse another €130bn - €145bn without a greater commitment to austerity in both the Greek public and private sectors. But without support from all three parties any commitment would be an empty one.

Usually, this would spell another round of talks, negotiations and some form of muddling through. However, this time they have essentially set a deadline of the start of this week to finalise the entire Greek package. The reason for this is the €14.4bn in Greek debt which needs to be paid off on 20 March. For the next bailout to be released, the 'voluntary' restructuring needs to have taken place and the new austerity measures need to be making their way through parliament. Without the money from the second bailout Greece will not be able to pay off this maturing debt. Most experts and those involved expect that six weeks is the minimum amount of time it will take to put the restructuring in place - meaning that it needs to get underway this week, hence the deadline.

There is also the 'side' issue of how much money will actually be paid out in the second bailout and whether the official sector (eurozone loans/ECB) will take losses in the restructuring. These are in themselves massive issues which will affect the future of the eurozone - particularly the role of the ECB (as we have previously discussed here). But in the eyes of the eurozone these discussions cannot even take place until there is a consensus from the Greek political elite to commit to greater austerity. Unfortunately, then, there are still some very big issues to be ironed out, even after the current disagreement is settled.

The term "knife edge" does seem fitting here...

Updates 06/02/2012: We will continue to update this blog with developments from Greece throughout the day.

09.30am - Reports this morning suggest Greece has been set a deadline of noon to find an agreement amongst the political parties in favour of the necessary austerity. However, this has been denied by Greek officials, who suggest the deadline is simply for an agreement to be struck ahead of the next eurogroup meeting (which was due to take place this afternoon but has now been moved to an undefined date).

12.20pm - RANsquawk is reporting that the Greek political parties have reached an agreement on a 20% wage cut and a reduction in supplementary pension, pushing them closer to a deal with the troika. No formal announcement yet but one is expected later today. Meanwhile, Merkel and Sarkozy have been holding a joint press conference in which (other than praising each other) they continued to reiterate their firm stance on Greece, although also stating that they expect an agreement very soon. If there is a consensus found in Greece today we can expect an emergency Euro-group meeting tomorrow or Wednesday.

2.00pm - Despite rumours of an agreement being reached, it looks as if the negotiations are far from over. Greek Prime Minister Lucas Papademos is set to hold talks with the troika later this evening to update them on his progress. Papademos will then hold another meeting with Greek political leaders tomorrow, presumably to communicate any messages which the troika wish to send. We assume the message will be for greater austerity. So don't expect a Euro-group meeting until at least Wednesday.

2.20pm - France and Germany earlier requested that Greece create a special account targeted at financing Greek debt, although specifically paying off interest rather than the total amount for now. The plan remains unclear and undeveloped but seems very similar to the recent German demands that Greek bailout funds go towards paying off debt first and foremost. Could the issue of an EU budget commissioner be revived during these negotiations then? Unlikely, but still risky ground for the French and Germans to tread given the heightened tensions since that leaked document.

5.20pm - After a slightly quieter afternoon than anticipated, AP has announced that there is a consensus between the Greek parties to accept the demand to cut 15,000 public sector jobs. A deal looks to be edging closer but is far from sealed yet. There is also set to be a general strike for the whole day tomorrow, meaning there is a good chance of massive protests and possibly even large riots in Athens.

6.15pm - Things have picked up again in the last hour, particularly with Greek PM Lucas Papademos reportedly asking the Greek Finance Ministry to do a thorough assessment of what a Greek exit from the eurozone would mean. Papademos is currently in a meeting with the troika (which began at 6pm), during which we're sure these reports will be broached, mostly likely with some disdain on the part of the troika. In the meantime, Merkel and Van Rompuy have been reiterating their positions by continuing to insist that the situation is not as bad as it seems and that Greece can avoid a default.


TigerEyes said...

I thought Feb 13 was the deadline, that's a week away

Denis Cooper said...

It's hard to believe that the Greek government would be left without the €14.4 billion on March 20th.

Even if there were still ongoing arguments over giving it the full €130 billion, or €145 billion, or whatever greater sum it had become by then, one way or another the €14.4 billion would be made available, "on account" as it were.

Sheona said...

It is somehow comforting to see that Greek politicians are actually concerned about the hardships inflicted on the Greek people.

Open Europe blog team said...

Thanks for the comments.

@TigerEyes: Indeed 13 Feb is the deadline for the absolute latest date at which the bond swap (the key part of the voluntary restructuring) can be offered to the market if it is to be completed in time (ahead of the 20 March debt repayment). That's why we suggest all the details of the austerity programme, the second Greek bailout and the bond swap plan need to be wrapped up early this week, so that the bond swap can actually begin on the 13 Feb. Even if the 13 Feb deadline is missed Greece wouldn't default until the 20 March.

@ Denis Cooper: We'd agree that it is still hard to envisage the eurozone allowing Greece to succumb to a disorderly default. As you suggest it could well be that some short term agreement is created, although that would raise serious questions about the credibility of the eurozone's conditions which they set on the bailout funds.

Denis Cooper said...

For clarification, what would the €14.4 billion cover?

Full repayment on the maturing bonds according the terms on which they were issued, or reduced repayment according to whatever deal Greece strikes with bondholders?

Open Europe blog team said...

@ Denis Cooper: The €14.4bn refers to the full amount maturing. At the moment it's not clear if any or all of these bondholders will take part in the voluntary restructuring. Naturally, since they are so close to getting paid out in full they have a huge incentive not to, but political pressure could force some of them to (particularly large European banks). If some do take part then less than €14.4bn may be required but given the opacity of the negotiations it's impossible to say by exactly how much it could change.

Anonymous said...

Disorderly default can be seen in 2 ways:
-for the country imvolved (Greece);
-the contagion aspect.

Re the latter there should now be measures in place when Greece and its banks go bust. Banks that are not yet prepared for that should go bust as they are horribly managed.

For Greece possibly a structured default is simply impossible as they look totally incompetent to organise things properly. Furthermore if there is a proper firewall around it, it is difficult to imagine it will effect the worldeconomy. It is simply much too small for that.
It will be a bit nasty in the country, but it will give a clear sign to other high debt nations, that there is really a line you should not cross. I would expect negotiations with Hungary for instance to go considerably more smoothly.

supermario said...

there is a consensus between the Greek parties to accept the demand to cut 15,000 public sector jobs. A deal looks to be edging closer but is far from sealed yet. There is also set to be a general strike for the whole day tomorrow, meaning there is a good chance of massive protests and possibly