Category Archives: Greek CDS

5/5/15: IMF, Greece & Europe: More Bickering, Less Tinkering?

An interesting article on Greece in FT: suggesting that the IMF is now actively drifting into fall-out management mode for Greek crisis.

According to the FT: "Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors." And this means that Greece is at a risk of failing to secure release of EUR3.6 billion worth of bailout funds - the IMF share of the EUR7.2 billion of Troika funds - that still remain to be disbursed to Athens.

Absent these funds, Greece is insolvent, full stop.

Basically, per IMF projections, debt sustainability in Greece requires 3% primary net lending / borrowing balance in 2015 (up on estimated surplus of 1.5% in 2014) and this is required to rise to 4.5% in 2016-2017 and 4.24% in 2018-2020. In Euro terms, 2015 primary surplus required is EUR5.49 billion. Instead, the IMF now estimates that the country will be running a primary budget deficit (not surplus) of 1.5%.

Primary balance is Government balance excluding interest on debt.

If true, the deterioration in Greek finances so far this year is massive. And there is no way of correcting for it, unless either Greece imposes much more severe austerity or there is a formal and significant debt restructuring for debts held by the 'official sector' - aka Troika.

Per FT report, sources close to the Eurogroup claimed that “The IMF thinks the gap between the two realities is very large right now,” said one senior official involved in the talks. A stand-off between the IMF and eurozone creditors over Greece is not unprecedented. Three years ago, the IMF refused to disburse its portion of the aid tranche because of similar fears Greek debt was not falling fast enough. The IMF only signed off after eurozone ministers agreed to consider, but never implemented, writing down their bailout loans to reduce Greece’s debt to “substantially lower” than 110 per cent of GDP by 2022. It currently stands at 176 per cent." So in other words, the IMF appears to be pushing for a debt restructuring for Greece.

In a separate report: Germany Finance Minister Wolfgang Schaeuble denied the IMF is pressuring the Eurogroup to restructure Greek debts.

As I noted in January (, this is by far the most often repeated disagreement between Greece, Europe and the IMF. And it comes as the Eurogroup attempts to structure another bailout package for Greece. So far, rumours have it, the Eurogroup outlook for Bailout 3.0 needs are pitched at EUR30-50 billion. But, as FT notes, "rising deficits could change that calculation."

Meanwhile, Greece continues to stumble from one payout to next - on a weekly basis -

And now we have a smell of napalm in the morning - some signs of bond markets repricing peripheral risks for the euro area:

1/5/15: Good News May Hide Bad News When it Comes to Greece

Greek 5 year CDS (Credit Default Swaps) continued to tighten dramatically today:

Source: CMA
Note: CPD refers to Cumulative Probability of Default (5 years)

Per Bloomberg, this is down to Greek Prime Minister Alexis Tsipras stepping up "efforts to clinch a deal that would unlock financial aid… The ASE Index of stocks jumped the most since September 2012 from a two-year low on April 21. It ended up 6.1 percent in April, the biggest rally in western Europe. Bonds returned 13 percent, while securities in the rest of the region fell. Investors put money into Greek assets in April, betting the rally may have more to go if a default is averted. The nation and its creditors hope to reach a preliminary agreement by Sunday, ahead of a scheduled meeting of euro-area finance ministers on May 11, according to three people familiar with the matter." More on this here:

One factor unmentioned is sidelining of Greek Finance Minister in leading the negotiations with the Troika. Another factor is growing discontent within the Greek ruling coalition - a move that increases pressure on Tsipras to get a new deal. My sources in Greece claim there are big disagreements within the Government and main parties. Much of this is focused on hard left's view that Syriza is abandoning its Programme promises. But, as common, much of it also about individual personalities.

Greece is a recurring nightmare - for Europe and for Greece itself.

The country had to be bailed out twice already, borrowing EUR240 billion from the European partners and the IMF. Its Government debt stands at 177% of GDP. The economy is down 25% since 2010 and unemployment rate is at 26%.

It is crunch time for the country:

  • European position is that there is no question that Greece is responsible for the mess the economy is in. The problems - with external and fiscal imbalances - started with misguided policies, dishonest accounting and reporting of the fiscal environment, and this continued over many years. The problems were exacerbated by structural weaknesses in the Greek economy. So from the European perspective, a member state, like Greece, simply cannot continue endlessly violating rules. Which means that Greek debt write down via official channels is impossible. And since the banks and private investors have already taken a 50%+ write down on their claims, further debt relief is not on the cards.
  • The Greek view is the exact opposite. And it has some reasonable ground under it too. Greeks see their situation as being forced onto them by Europe and, rightly, recognise that the country simply cannot repay the debts accumulated. Worse, the economy, in its current state, can't even fund these debts. We are now witnessing weekly liquidity squeezes, the latest being over the tiny EUR200 million interest payment this week.

Greece is being squeezed on liquidity front much more seriously than the immediate pressure points suggest.

Banks are losing deposits - probably over EUR5bn in April, on top of some EUR27 billion in 1Q 2015 which marked a 16% decline. These are being replaced by weekly increases in ELA by the ECB. In April alone, ECB hiked ELA by EUR5.6 billion.

Government is also running out of money. In first two weeks of May, Greece will need to refinance EUR2.8 billion of Treasury T-bills, repay EUR800 million on IMF loans. In June - EUR1.5 billion of IMF debt, EUR3.2 billion in T-bills. So there are big bills coming due.

Meanwhile, the Government is having difficulty paying pensions and public sector wages. The Government have already drained the local authorities funds, requiring their transfers to the Central Bank. Which provided somewhere between EUR1.6 and EUR1.9 billion in deposits. Not enough to cover May liabilities.

Beyond that: big redemptions are due in 2016: total of just over EUR5 billion, 2017 - over EUR6 billion, and 2019 - just under EUR11 billion. These are completely unfunded at this stage, as Greece needs to negotiate a new support package with the EU, IMF, and ECB - the so-called Institutions.

And things are still very trigger happy.

  • "Panic descended in Athens on Thursday as Greece’s 2 million pensioners were hit with delays to their monthly state stipend. Pensioners raided their accounts and broke into a board meeting, according to reports."
  • And quoting from the EUBusiness news linked above: "...the Greek government, ...insists it will not back down from 'red lines' on labour protection and wage cuts. A Greek government source on Thursday said Athens wanted a deal without austerity "crimes" against the Greek people. ...would not back down on labour issues, income cuts, the sale of state assets at whatever cost and a hike in VAT.""
  • And the external environment remains also volatile. As Reuters described this scenario: "“We’re going bust.” “No, you’re not.” “You’re strangling us.” “No we’re not.” “You owe us for World War Two.” “We gave already.” The game of chicken between Greece and its international creditors is turning into a vicious blame game…" The problem, as anyone familiar with the game theory knows, that in the game of chicken, switching into unstable strategies may lead to a worse outcome if expected payoffs from non-cooperation (head-on-collusion) are raised. When you start publicly accusing the other side of being intentionally damaging and/or dishonest, you are getting the cost of stepping down from brinkmanship only much higher.

Three options are open:

  • Structured write down of official sector debts : EFSF, ESM, and ECB. But not the IMF, leading to no Grexit and a path toward repaired economy;
  • Hard default with resulting Grexit and massive mess across both the EU and Greece; and
  • Kicking the can down the road once again by securing another bailout agreement to take Greece through 2015-2016. The problem here is that unless Greek economy starts a dramatic recovery, 2017-2020 will see renewed pressures of default and Grexit.

All in, the third option is currently the most likely one. Welcome to Europe's Groundhog Day, Season 8.