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Tuesday, July 09, 2013

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.


Eric B. said...

Cash-for-reforms? It is no cash, but credits. And it is not about reforms, but about the destruction of a state. All these "rescue" measures are riding Greece even deeper into the crisis, just have a look at growth (-5 per cent) and the dept ration (180 per cent). But you guys in the UK seem to like this Kind of "help"...

Rik said...

1. There seems to be a nearly perfect correlation between buying time (what we see here for the 382746th time in this crisis) and PIIGS postponing structural measures.
Nothing is solved and it is completely unlikely that something will occur that solves the crisis in another way. Simply kicking the can, buying time.

2. Highly dangerous therefor imho. Not only relating to Greece directly but also in other ways.
-How long will parliaments up North accept this nonsense? And as the preliminary question to that: how long will their voters do that?
-When will markets start to price in long term (1 or 2 decades for most and for some even more) Japanese (at best) conditions. Because that is what it does. It assures that the bottom is not falling out, but nothing more than that. There is no basis for future growth. And Japan has a proper economic basis and a lot of local savings, something most Latinos donot have. Furthermore Japan had only competition in the first part of the stagnation from countries that were roughly as expensive. PIIGS have competition from all over the place and nearly all are much cheaper. So likely it will be much worse.
-Also in the South when will people get enough of it and go the Euro-sceptic or anti-Euro way.
-It simply gives a rotten example to Italy and Spain. 'You will get away with it'. While these 2 are likely TBTS.

It is clear that this way the Southern PIIGS will not get their business in order (and the same goes for France and Belgium). Structurally uncompetitive combined with a welfarestate that is unaffordable (France and Belgium) or locals donot want to pay the price for (rest of the South).
The only things that is happening is that the hole these countries are in gets deeper and deeper (read at the bottom/new start, debtlevels will be considerably higher).

Simply a short term fix with big medium and longer term downside risk.

The plan is set up basically with not much room and on unrealistic prognosis. If history is a guide and it very likely is, both will not be met. Simple maths says subsequently that there will be a hole (unless there is fresh plumbing) and it will be there soon.

No use to recap the banks as well (as some French moron suggested). Next to the fact that these need a new businessmodel as well before in anyway capable to compete in an open European market, they will be gone when the country collapses. Which would leave say the ESM (next to the ECB) with a huge loss.
While the country still is not able to function normally.
For that structural cost level of government services should go down considersably. Government should be made much more efficient. Sov debt should be reduced. And the country should have a competitive pricelevel.
If one of these fails basically meeting thew others is rather useless. So why risk your EU money for something that hasnot got direct effect anyway.

Jesper said...

I'm not so sure that the German elections is a factor, I'd expect that Germany will act the same no matter the elections. The elections is a nice excuse for doing nothing but wait.

When the bailout funding runs out then Greece will run out of funding and default.

The governments slim parliamentary majority is not much of a factor, the decisions have been taken but the implementation is slow. The slow implementation is understandable, who'd like to make themselves redundant without incentives/benefits?
The only cheap incentive that is still available is to do the opposite of what Eurocrats are doing. Eurocrats keep hours worked high per worker to keep wages high for the few. Greeks might do better to shorten the average working hours down from 2000 hours per year down to 1500 hours worked for year, that reduction in working time might make even a 25% reduction in pay more acceptable.

The average Greek tax-payer might find it more palatable to pay more taxes if the 'Lagarde-list' was being dealt with a bit swifter than what is currently happening. Sadly I do not see that happening.

Central banks rolling over their holdings of government bonds? Seems very illegal under current treaties (monetary financing).

Anonymous said...

Let us all be honest about what is going on.

Will Greece and Cyprus (and the rest of the PIGS plus France) EVER be able to pay back their debt?

With national GDP, Eurozone and EU GDP shrinking it is just impossible. So it will be bail-out after bail-out until the heavens fall in and the crash finally comes.

It must be obvious to all that this "kick the can down the road approach" that we have seen since 2008 is just building a bigger and bigger bubble which will soon pop.

In the meantime, the UK continues to accept allcomers from the EU, despite the fact that the country is GB1.2Trn (and counting) in debt and despite the fact that it is socially and economically unsustainable. The UK government is playing 'fast and lose' with our sovereignty and our balance sheet.

Thank you for giving our children the best present ever - that of the handcuffs of debt.

Europe is broken and those that broke it are still in power. More EU anyone? NO THANKS.


DVK said...

Do you think Europe is solvent?The undeclared bankruptcy of most European Banks how much of the states GDP represents?Do you believe that Italy and Spain are solvent?

Anonymous said...

What I can't get my head round is the continual demands to cut the civil services, lets be honest it is the civil servants that run the country not the politicians no matter what they might think, so if you continue to get rid of the people who actually run the country what are you left with....

Anonymous said...

The underlying problem of the Greek economy is the role played in the past by the Public Sector, starting in 1981. The Central Government infused loaned cash into the economy targeting solely increases in consumption while raising Public Sector wages and employment, in fact doubling the number of Public Sector
employees between 1981 and 1989 from 367000 to 720000. At the same time Tax income was marginally increased and real economy productive investment went down.This turned the private sector into a sea of shop owners so that by 2009 the membership of the trading guilds though out the country increased to the unlikely number of 840000 in a nominal total work force of less than 5.5 million, where the majority of operations were one man or one family overpriced consumption convenience businesses. These folded as demand plummeted and added to the "legally" unemployed "worker" statistics bringing the real unofficial unemployment number close to 1.5 million.