Saturday, June 20, 2015

Crunch time in Greece

It’s crunch time in Greece.  Last week’s Eurogroup meeting of Finance Ministers failed to break the impasse with the Eurogroup President Dijsselbloem declaring that “no agreement is yet in sight”.  A special euro area summit has now been called for Monday.   Overnight the European Central Bank has again increased its emergency lending to Greek banks a further €1.8 billion following the €1.1 billion made available last Wednesday.

Our view has been that a compromise would be reached, although it would likely fail to solve the actual problem of the unsustainability of Greece’s debt burden (see here).  Negotiating positions signal the Greek Government appears determined to deal with the fundamental problem while the bailout institutions seem determined to continue to muddle through.  Whichever side you’re on the essential point is that any deal between Greece and its creditors that doesn’t deal with Greece’s unsustainable debt burden simply kicks the can down the road.

So as it stands there is still a significant gap in negotiating positions between Athens and the bailout institutions and time is running out.  Greece has a payment of €1.6 billion due to the IMF at the end of this month with a further €2.2 billion due by the end of September.  Failure to meet those payments will see Greece in default and the IMF has indicated there will be no grace period.  However, if a late agreement is reached the IMF, ECB and EU may agree to delay payment until any necessary parliamentary votes and referendums can take place.

A German newspaper has reported the possibility of an extension in the current bailout program to the end of the year, although that would be without the participation of the IMF.  That would see the €10 billion currently earmarked for the recapitalisation of Greece’s banks being used to settle Greece’s pending obligations to the IMF and ECB out to the end of the year.  While this has been refuted by a number of EU diplomats as being “unworkable”, given the tight timeframe to the end of the month it’s an option to avoid default.

So Monday’s meeting is critical.  It’s in the interest of both sides to reach an agreement: for Greece to avoid a banking crisis, economic mayhem that would follow if they have to balance their budget immediately and forced exit from the Euro; and for creditors to preserve as much as possible of the €300bn or so lent to Greece and to head off any contagion.

If Greece is forced out of the Euro the only good news is the rest of Europe is in far better shape now than in 2010-12 with Portugal and Ireland now both off bailout support, peripheral countries having reformed their economies and reduced their budget deficits and the ECB in a far stronger position to protect countries from attacks on their bond markets (via both its QE program and its Outright Monetary Transactions program which enables the buying of bonds in troubled countries).