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Monday, November 05, 2012

A big week for Greece - but still few answers

As we noted in our press summary today, this week is lining up to be another big one for Greece.

The Greek government faces two crucial votes in parliament – first on Wednesday to push through the latest package of structural reforms (as demanded by the EU/IMF/ECB) troika and second on Sunday to approve the latest and, according to Greek PM Antonis Samaras, the last austerity budget for next year.

Since the governing coalition was formed after the second summer elections, such votes have usually passed without much fanfare. However, this time around the Democratic Left (which holds 16 seats in parliament) has said it will not vote with the its coalition partners. Pasok (which holds 31 seats) is also facing a period of internal strife with one MP already leaving and up to five others threatening to at least vote against the government. New Democracy (127 seats) should have an easier job pulling its MPs together.

The votes should pass but the margin for error is tiny, possibly only two or three votes, notably provoking unrest amongst financial markets and other eurozone leaders. In the end, given that the end of the government would very possibly signal the end of Greece as eurozone member, the (perceived) fear factor is likely to be enough to once again push the vote through.

This clears the way for the release of the next €31.5bn tranche of bailout funds and a potential two year extension to the Greek bailout. Today’s FT notes that the extra funding for the extension is likely to come from an increase in short term debt issuance by Greece and possibly a reduction in interest rates on eurozone loans to Greece – exactly as Open Europe predicted in its recent flash analysis on the issue.

The FT article also includes a potential plan for the ECB to return profits from its purchases of Greek bonds to Greece via eurozone governments to avoid the thorny issue of the central bank directly financing a state. This sounds plausible on the surface since the returning of profits to national governments should happen naturally anyway under the ECB rules. The only issue being that this can only happen overtime as the profits accrue as the bonds are paid off, so its unlikely to be paid out in a single chunk at one time (as is needed here).

One final point on the cost of the extension. We put it at around €28.5bn, although estimates range from €15bn to €40bn. We didn’t include a delay in Greece’s return to borrowing from the markets, which is looking increasingly likely. If Greece doesn’t return to borrowing until after 2016 it could add a further €10.6bn to the cost of an extension.

So although this is a big week for Greece, even a clear government win in both votes will do little to answer questions over Greece’s future in the eurozone.


Rik said...

The bottom has simply fallen out. It took much time and with too much bad press.
Everytime they are further caught in the same sort Catch22.

On one side if they gave too much room, Greeks are sure to take it. Plus it cannot be explained at home with the rescuers.
The other side: Greek never meets its obligations and with no flexibility built in you need a new rescue package every half year.

So next term they will be able to shuffle things under the carpet if there is a new package. But after that like now that will be impossible and the whole circus will start again. Burning taxpayer money and political capital like christmastrees after newyear.

Rik said...

At the end of the day this is simply a financial calculation.
1. Start with the spreadsheet of early this year.
2. Plug in the new figures
3. Adjust for reality. What I mean is that Greece if able to correct 1.5% annually will not start to do make 2-3% corrections. Income/Tax revenue estimates probably too high. privatisations a disaster etc. Where would Greece have growth from. This situation is only partly cyclical. If your cycle has to go up but you keep creating new mess like in Greece and of that magnitude you will in reality not go up. Missing targets in a similar way as before.
Not even plugging in a calamity like a far right far left election victory.
Furthermore no cuts means simply the hole is only temporary (liquidity but not solvability) plugged.
4. Same procedure as last time is that Greece doesnot meet its targets. First term easily to be brushed under the table, but the second it will start to show.
5. Imho we will have clear proof again in 6-9 months time.
6. Basically the IMF is the most important to watch in the troika stage.
Everybody is saying Greece is ok so no problem simply isnot that easy. Who has to pick up this bill is still very uncertain.
7. Doubtful if IMF can go for it now and even more doubtful if it can continue doing that.
8. Haircuts are imho first necessary when the officials will exit (all has to be financed by them anyway till then). But with the IMF it works differently.
9. Thing to watch is haircuts of officials. From there basically things will start to run over the budgets and that likley will mean war in some countries. Now it is not seen as an expenditure just as off balance basically guarantees. And with Greece a large part of the loans are direct from other memberstates.