Greece: Last chance saloon
It has been two arduous months since the Syriza party won the Greek elections on a platform to renegotiate the country’s debt and terminate austerity measures imposed by the IMF/ECB/European Commission Troika. The negotiations between Greek Finance Minister Varoufakis and his eurozone counterparts have generated much noise but seemingly achieved little.
A more constructive view is that the range of likely outcomes, which I highlighted in Fifty Shades of Greece, has narrowed – and markets tend to favour certainty to unpredictability. Prime Minister Tsipras’ government has so far proven wrong the pessimists predicting the country’s imminent exit from the eurozone. The eurozone’s main protagonists understand, in private at least, that a Greek default and/or exit from the eurozone would seriously dent the European project at a time when Russia is trying to expand its influence westward. It would also likely mean large losses for eurozone creditors, including the European Central Bank (ECB), and national governments and banks.
There have also been modest compromises. The ECB agreed to raise the amount Greek banks can borrow from their central bank under the Emergency Liquidity Assistance program to € 71.1bn. Eurozone policy-makers have seemingly, albeit begrudgingly, accepted the government’s less ambitious primary fiscal surplus target of 1.5% of GDP for 2015 – half the original Troika-mandated target and only a marginal improvement on the estimated surplus of 0.3% of GDP in 2014.
At the same time, the Troika has held firm that there would be no debt restructuring, let alone forgiveness, or significant scaling back of the reform effort. If anything, eurozone leaders are more united in their view that Greece can and should repay the principal and interest it owes to both private and official creditors. French President Hollande initially entertained the idea of a Greece debt restructuring but now appears to have fallen in line with Germany’s uncompromising stance. The Spanish and Portuguese prime ministers, watchful of their own electoral positions should Greece succeed and emboldened by the ECB’s QE program, are clear that Greece should not benefit from further concessions lest it creates a dangerous and unfair precedent.
So for all its populist posturing, Syriza is facing up to the harsh reality that eurozone creditors are not for turning and that importantly time is running out.
The government is already scraping the bottom of the financial barrel. It has been forced to transfer cash reserves of state institutions to the central government common fund to help pay for end-month wages and pensions estimated at €1.7bn.
The government also faces principal debt repayments of about €3bn in April. These include a €460mn payment to the IMF on 9th April (out of about € 31bn outstanding to the IMF) and €1.4bn and €1.0bn maturities on 6-month T-bills on 14th and 17th April, respectively. These payments will overstretch the government’s finances, assuming that a default on debt owed to the IMF – a lender of last resort with preferred creditor status – is almost inconceivable.
The Troika has closed off to the Greek government a number of avenues of financing (see Figure 1). The ECB recently made legally binding the cap on Greek banks’ holding of T-bills, thus limiting the amount of short-term debt the government can issue to finance itself. Eurozone finance ministers also concluded that the unused €1.2bn of cash from the Greek Bank Recapitalisation Fund was correctly returned to the EFSF bailout fund, dashing the Greek government’s hope of getting these monies any time soon.
So the government is now increasingly reliant on the €7.2bn of outstanding bailout funds, which the eurozone has made conditional on Greece sticking to its reform and austerity drive. As a result, the government is gradually scaling back its pre-electoral promises. It has accepted a four month extension to the current lending program. It has just put the finishing touches to a package of measures to raise €3bn, which on top of a crackdown on tax evasion, higher taxes for top earners and a VAT overhaul, includes i) re-launching its privatisation program (although it will maintain managerial control of key state assets), ii) introducing levies on alcohol and cigarettes and iii) pushing ahead with labour market reforms.
It’s not in the bag yet, though. The Troika has suggested that bailout inspectors first need to green light the government’s package and it would then require hard evidence that the program is being implemented. So coming weeks will be critical.
The government faces debt payments in May of a similar magnitude (€3.6bn) and a cumulative hump in June-July of about €12.7bn, but the ECB may by then be in a position to buy Greek bonds via its Quantitative Easing (QE) program. This would help the government get renewed access to capital markets at non-prohibitive rates (see Figure 2). Repayments of T-bills, bonds and loans also become far more manageable in 2016, with maturities of about €6bn – a fraction of this year’s €39bn according to the Finance Ministry.
The ECB’s QE and signs of improving eurozone growth, including a jump in the PMI composite output to a near four-year high in March, have so far acted as a circuit-breaker to contagion from Greece to broader European markets. Eurozone equities are up year-to-date (even in $-terms), peripheral yields are down (see Figure 2) and the Euro has rebounded since mid-March. Finding a lasting solution to Greece’s economy remains, for now, an important missing part of the eurozone puzzle.
Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He is a former G10 and emerging markets economist, rates and currency strategist with over 15 years experience with two of the world’s largest investment banks.
Fig 1 – Hellenic Republic Debt Bulletin, IMF