Category Archives: ESM

18/7/17: Greece in Recession. Again.

Per recent data release, Greece is now back in an official recession, with 1Q 2017 growth coming in at -0.1%, following 4Q 2016 contraction of 1.2%. Worse, on seasonally-adjusted basis, Greek economy tanked 0.5% in 1Q 2017. The news shaved off some 0.9 percentage terms from 2017 FY growth outlook by the Government (from 2.7% to 1.8%), with EU Commission May forecasting growth of 2.1% and the IMF April forecast of 2.15%, down from October forecast of 2.77%.

Greece has been hammered by a combination of severe fiscal contractions (austerity), rounds of botched debt restructuring, and extreme fiscal and economic policy uncertainty since 2010, having previously fallen into a deep recession starting with 2008. Structural problems with the economy and demographics come on top of this and, at this stage in the game, are secondary to the above-listed factors in terms of driving down the country growth.

In simple terms, this - already 10 years long - crisis is fully down to the dysfunctional European policy making.

In real terms, Greek economy is now down almost 3 percentage points on where it was at the end of 2000 and even if we are to assume that the economy expands 2.15% in 2017, as projected by the IMF, Greece will still end 2017 some 0.76 percentage points below where it was at the start of its tenure in the euro area.

Meanwhile, the 2.1-2.15% forecasts are likely to be optimistic. Past record shows that, so far, since the start of the crisis, IMF’s forecasts were woefully inadequate in terms of capturing the true extent of the crisis in Greece.

As chart above shows, with exception of just two forecasts’ vintages, covering same year estimates (not actual forward forecasts), all forecasts forward turned out to be optimistic compared to the outrun (thick grey line for April 2017).

Another feature of the more recent forecast is that 2017 IMF outlook for Greece factors in worse expectations for 2018-2021 growth than ALL previous forecasts:

The key driver for this disaster is the EU-imposed set of policies and the resulting policy and economic uncertainty. In fact, if we were to take the lower envelope of growth projections by the IMF - projections that were based on the Fund’s assumptions that the EU will live up to its commitments to accommodate significant debt relief for the Greek economy from around 2013 on, today’s Greek real GDP would have been around 20-21 percent higher than it currently stands.

All in, Greece has sustained absolute and total economic devastation at the hands of the EU and its institutions, including ESM, ECB and EFSF. Yes, structurally, the Greek economy is far from being sound. In fact, it is completely, comprehensively rotten to the core and requires deep reforms. But this fact is a mere back row of violins to the real drama played out by the Eurogroup, the ESM and the ECB. The nation with already woeful demographics has lived through sixteen lost years, going onto seventeenth. Several generations are either face permanently damaged prospects of future careers, or have to deal with demolished hopes for a dignified retirement from the current ones, and a couple of generations currently in lower and higher education are about to join them.

17/7/15: Eurogroup tightens screws on Greece: Bridge v MoU

Eurogroup statement on Greece (h/t @FGoria):

  • Bridge finance via EFSM (as rumoured, so no surprise here);
  • Bridge finance security cushion via SMP profits being moved to an escrow account (unexpected) clearly to ensure Denmark's and UK agreement to use EFSM. Bad news: SMP profits should be rebated back to Greece to alleviate debt burden, not 'securitised' to increase debt burden;
  • Good bit - SMP profits are to be returned to Greece unless used as EFSM bridge loan cushion. So at some point in time, Greeks will get these funds to, presumably, cover a part of bridge finance funding;
  • The bit "...he risks of not concluding swiftly the negotiations with the ESM remain fully with Greece" (emphasis mine). This amounts to setting pressure very high on Greek Government to basically accept MoU conditions unaltered, as presented to them and, thus, makes the very idea of 'negotiations' a farce. Given that EFSM cover (bridge) is only for July, at most for first week of August, this statement basically puts Greece on notice: either agree immediately to ESM (Bailout 3.0) conditions or face a loss of SMP funds on top of everything else.
In effect, Eurogroup is driving home the tactical advantages gained by over-extending Bridge loan negotiations into the last minute and from Tsipras' total surrender at July 12-13 meetings. Greece has no where to go, but to ESM at this stage, so my suspicion is that MoU will be tougher than Bailout in Principle position of July 12-13.

13/7/15: Sit Back and Watch That Eurogroup Unanimity Evaporate

Following the marathon meetings (14 hours-long Eurogroup followed by 17 hours-long Euro Council) the Greek 'deal' was heralded in the media and the markets as some sort of the Great Revelation - a solution to fix all prior non-solutions, a final fixing of the Greek economy and the end to all the endless bailouts of the past.

Of course, cynics noted that solving debt overhang (already officially recognised by the IMF as unsustainable) by issuing more debt may not be a good idea… but cynics are here to be ignored by the Euro optimists who define their own reality.

But never mind all the 'long run' stuff. Five hours into a 'unanimous' Eurogroup decision on Greece, there is neither much of a unanimity, nor much of a decision left.

Eurogroup agreed, amongst other things, that:

  • Greece will be - in principle - granted new funding of some EUR82-86 billion. The future is preliminary and will have to be finalised to fully reflect the economic conditions deterioration since January, as well as other factors. In addition to fiscal funding, these money will also be used to recapitalize Greek banks (current running estimate is for EUR10-25 billion in recaps, but the actual amount will not be known until there is a full and 'comprehensive' assessment of the banks books (to be carried out in September-December 2015).
  • While nothing is certain about this 'longer term' EUR82-86 billion package, there are immediate needs for funds that Greece has to meet. With today's missed IMF repayment, there's EUR4.934 billion due in the rest of July. There's EUR1.544 billion overdue from June. And there's EUR4.188 billion due in August. Total of EUR6.477 billion is due to the ECB alone. There is no expectation that the 'long term' package will be ready before much of this comes due, so Greece will clearly need a 'bridge financing' arrangement. There is an added 'complication': before ECB can be paid (a default on ECB will trigger a cascade of cross-defaults and a closing of the banks' oxygen line, the ELA), the IMF arrears have to be cleared in full. 

The 'bridge financing' should be a walk in the park, right? After all, there is a unanimous agreement to set new funding for the longer term, and a part of this is the recognition that before such an agreement is struck, there is a unanimous (one assumes) agreement that Greece needs to be helped through the intermediate period.

Unanimity bit

Today, there was a shorter Eurogroup meeting to sort that little bit of 'unanimity' out. And the conclusion was: err… no unanimity and:

  1. A new delay in sorting out longer-term financing (from today's morning expectation of 2 weeks to more realistic 4 weeks); and
  2. There is no agreement on bridge financing. Worse, per Dijsselbloem: "We looked at the issue of bridge financing because there are urgent needs and this process of finalising an agreement will take time… This is very complex, we looked at a number of possibilities, but there are technical, legal, financial and political issues to consider, so we have tasked an ad-hoc working group of technical experts to look into that".

Finland's Fin Min Alexander Stubb said that "Greek Bridge Financing Still an Open Question. I foresee those negotiations being very difficult because I don't see many countries having a mandate to give money without any conditions." Oops… as they say in Helsinki. Slovakia's Government has stated they oppose any lending to Greece, including both bridge and long term financing. Austria, Estonia, The Netherlands and a number of other countries will need to approve every move via their parliaments. All three been pretty sceptical on 'bridge financing' from July 6th on. Slovenia is set against the bridge funding too.

And then there's Germany - which is, for now, sitting pretty quiet on the topic, but don;t expect an easy push over from Merkel - Schäuble duo. After all, the latter has managed to square off with Mario Draghi on the topic of ECB operations in a nasty exchange yesterday.

Beyond the unanimity bit... logistics

Beyond the unanimity bit, there's a technicality or logistics of structuring the deal… bridge financing is hard to construct, given the Byzantine (actually far worse, by now) European institutions.

There are basically two possible options.

Option 1: Using EFSM bailout fund to loan money to Greece. The option is easier, as it does not require unanimity, but can be passed on the basis of QMV. The fund, however, does not have enough money to finance July-August liabilities due on the Greek side. Reportedly, the EFSM only has EUR11.5 billion available (although some reports put the figure at EUR13.2 billion). And EFSM is no longer an active lender, since it is superseded by another fund, the ESM. Even when the EFSM was operative, it was limited to co-funding bailouts with IMF involvement. IMF is not a party to any bridging loans arrangements, and indeed is not a party to the entire Bailout 3.0 package agreed 'in principal' this am. Added complication: EFSM can be activated by a qualified majority, but a QMV of EU28, not euro area alone. Back in 2011, Britain voted against the use of the EFSM to bail out Greece for a second time.

Option 2: Greece funding itself via issuance of T-bills, selling these to the banks with the banks using ECB ELA to finance these purchases. Which carries two problems with it. One, ECB is yet to hike ELA. Two, T-bills are short term bonds and Greece is constantly rolling over substantial quantity of them in the markets. Issuing more will clearly impair Greek Government ability to secure short term funding. And it will also likely trigger serious discontent within euro area 'core' states - the hawks that 'guard' ECB's prohibition on 'monetary financing'.

Option 3: A combination of Option 2 and bilateral loans. The problems, in addition to Option 2 is that some countries (Finland and Slovakia - explicitly, Germany and the Netherlands, for now implicitly) have ruled out participating in the scheme. Which makes such lending a tough sell for other member states. Italy stated already that it will only supply bilateral loans if all other euro area states do so.

Option 4: Using SMP profits accumulated at the ECB and in the national central banks from Greek bonds coupon payments to lend to Greece from ECB to repay ECB and IMF loans. Problem here is that 2014 profits still retained amount to EUR1.9 billion, while 2015 profits yet to be paid amount to 1.4 billion. Clearly not enough to close the gap.

Update 14/7/2015: FT blog on the Eurogroup technical paper outlining options for Greek bridge financing is here:

4/7/15: Timeline for Greece and Some Anchoring

Greece timeline for the weekend:

Greece has missed the IMF and ECB payments this week with both non-payments having potential for triggering a mother of all defaults for Greece: the ESM/EFSF loans call-in (EUR145bn worth of debt).

The EFSF/ESM decision so far has been to 'ignore' the arrears, noting that non-payment to IMF qualifies as "an event of default":

"The Board of Directors of the European Financial Stability Facility (EFSF) decided today to opt for a Reservation of Rights on EFSF loans to Greece, after the non-payment of Greece to the International Monetary Fund (IMF). Following the IMF Managing Director's notification of the IMF Executive Board, this non-payment results in an Event of Default by Greece, according to EFSF financial agreements with Greece."

Greece owes the EFSF EUR109.1bn in "Master Financial Assistance Facility Agreement" loans, plus EUR5.5bn in "Bond Interest Facility Agreement" loans and EUR30bn more in "Private Sector Involvement Facility Agreement" loans.

For now, EFSF decided not to call in loans, preferring to wait for Sunday vote outcome. Per EFSF statement: "In line with a recommendation by the EFSF's CEO Klaus Regling, the EFSF Board of Directors decided not to request immediate repayment of its loans nor to waive its right to action – the other two possible options. By issuing a Reservation of Rights, the EFSF keeps all its options open as a creditor as events in Greece evolve. The situation will be continuously monitored and the EFSF will consider its position regularly."

A 'No' vote in the Sunday referendum can change that overnight.

This adds pressure on Greece to pass a 'Yes' vote - a pressure that is most publicly crystallised in the form of ECB refusal to lift ELA to Greek banks. Athens imposition of capital controls (limiting severely cash withdrawals from the banks) has meant that the current level of ELA (CHART below) is still sufficient to hold the bank run, but the ELA cushion remaining in Greek banks was estimated at EUR500mln at the start of this week. Even with capital controls in place, this would have dwindled to around EUR250-300mln by the week end.

Again, a 'No' vote in the referendum risks crashing Greek banks as ECB will be unlikely to lift ELA any more. In an indirect sign of this, the ECB appears to be setting up swap lines and euro credit lines for EU member states outside the euro area. For example, as reported by Bloomberg, "European Central Bank is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation". Such a move is a clear precautionary measure to put into place firewalls around Greek system.

Meanwhile, here is a report suggesting that Greek banks are preparing for an aggressive bail-in of deposits in the case of a 'No' vote (assuming ELA cut off):

The Government denied the reports of preparations of bail-ins, and continues to insist that the banks will reopen on Tuesday, a day after the referendum results are published, but it is hard to imagine how this can be done (unless the banks start trading in drachma) without ECB hiking ELA, and it is even harder to imagine how ECB can hike ELA in current conditions.

Source: TheodoreZ

So far, public opinion polls in Greece show very tight vote for Sunday. The latest GPO poll has the "Yes" vote at 44.1% and "No" at 43.7%. Alco poll puts the “Yes” figure at 41.7% against 41.1% for “No”. All together, four opinion polls published yesterday put the 'Yes' vote marginally ahead, another poll fifth put the 'No' camp 0.5 percent in front. All polls results were well within the margin of error. At the same time, majority of polls also show Greeks favouring remaining in the euro by a roughly 75 percent margin.

Sunday 5th July:
Polls open – 0500BST/0000EDT
Polls close – 1700BST/1200EDT

First exit poll – Shortly after 1700BST/1200EDT

~20% of votes counted – 1900BST/1300EDT
~50% of votes counted – 2100BST/1600EDT
~70% of votes counted – 2200BST/1700EDT (markets open)
~90% of votes counted – 0000BST/1900EDT

Timeline source: Trading Signal Labs

The build up of tension ahead of the Sunday poll has been immense. Even international bodies are being convulsed by the potential for a 'No' vote. So much so, that, as reported by a number of media outlets, there was a major cat fight between European members of the IMF and other IMF board members.

As reported by Reuters at Wednesday board meeting of the IMF, European members of the board attempted to block IMF from publishing its analysis of debt sustainability for Greece.

Quoting from the report: ""It wasn't an easy decision," an IMF source involved in the debate over publication said. "We are not living in an ivory tower here. But the EU has to understand that not everything can be decided based on their own imperatives." The board had considered all arguments, including the risk that the document would be politicized, but the prevailing view was that all the evidence and figures should be laid out transparently before the referendum. "Facts are stubborn. You can't hide the facts because they may be exploited," the IMF source said."

If only European members of the IMF Board were as concerned with the reality of the Greek crisis on the ground as they are concerned with the appearances and public disclosures of that reality.

A neat reminder of how bad things are in Greece today, via @RBS_Economics

Source: @RBS_Economics

As numbers tell, Greece has posted one of the worst collapses in economy for any advanced economy since 1870, fourth worst for periods outside WW1 and WW2.

So what to expect?

  • In the event of a 'Yes' we are likely to see a significant bounce in the markets from the current levels, with euro strengthening on the news in the short run. But real re-pricing will only take place when there is more clarity on post-referendum bailout agreement. The key risk to that outlook is that a 'Yes' vote can trigger early elections - which will (1) extend the current mess for at least another 1-2 months, and (2) put new sources of uncertainty forward - as outcome of such elections will be highly unpredictable. I do not expect the EU to re-start new deal negotiations until after the elections, which means that there will be mounting, not abating pressures on the Greek voters to vote in 'the right' Government, acceptable to the Troika.
  • In the event of a 'No' we are likely to see serious run on the markets in Greece and some 'peripheral' states, especially Italy. Greek capital controls will have to be stepped up significantly. Euro is likely to weaken in the short run, especially if ECB aggressively moves to monetise risks via both accelerated QE purchases and lending to non-euro banks.

Beyond these two possible scenarios, everything else is in the realm of wild speculation.