Category Archives: grexit

10/7/15: New Greek Proposals: Can + Foot ≠ Real Solution

Greek Government proposal to the EU on Bailout package 3.0 have been published here:

Quick read through suggests the following:

  • These proposals are pretty much in line with June 26th proposals that were subsequently rejected by the 'No' vote in the Greek referendum;
  • The 'new' proposals appear to be a complete climb down from the Greek Government counter-proposals on key areas of VAT, pensions and islands measures;
  • One key strategic point is that the new proposal accepts fully 'prior actions' principle of putting in place legislative backing for key early measures ahead of any bailout funds disbursal;
  • The 'new' proposals submitted to Institutions contain no reference to debt sustainability and debt relief, although it appears that a preamble to the document in Greek version does mention debt relief.  There are reports also that Greek proposals sent to the Parliament contain reference to the EU commitment to 'negotiate with Greece on the issue of debt sustainability post-2022'. Which, if true, is a dead giveaway, as no one will honour any commitments on such a time scale and absent any specific conditions on debt sustainability. 2022 is the year chosen because it is when EFSF repayments start. Most expensive debt to carry for Greece - IMF and ECB - is off limits for any restructuring under this timeline;
  • Crucially, the new proposal does not address in full how Greek banks ELA will be covered, and how the arrears to IMF will be covered. Neither does it explain how July 2015 debt repayments will be financed. This, jointly, means that the EUR53.5 billion request for new loans is not sufficient. The Institutions, most likely, will ask for a deposits bail-in. 
  • The only differences to the 'old' Institutions' proposals include: smaller cut in defence budget (EUR200mln instead of EUR400mln), slower phasing out of the islands reduced VAT rates (throughout 2016) and slower phasing out of the EKAS supplement on pensions.
  • Greek proposals contain a sub-clause of defined actions that will kick in automatically if fiscal targets are not met in the future. These include hikes on income tax for those earning EUR12,000 (2 percentage points to 35%).
  • Materially, the new 'proposal' involves EUR53.5 billion in new loans via ESM (ex-IMF): IMF porgramme runs through April 2016 and, presumably, Bailout 3.0 is going to happen via ESM alone. Which is a net negative for Greece, since it will lose its only support on debt writedown side.

These are the details so far.

My view is that this proposal will probably be acceptable to the EU, which will close its eyes on two glaringly obvious things:
1. The proposal from the EU on which this current Greek counter proposal is based was based on assumptions and estimates that are at least 3 weeks old, and for some figures - older. Economic and fiscal losses since then have been significant and most likely remain un-covered by the current Greek proposal. These losses will not be terminated immediately post-agreement, so the Greeks have a much more serious problem on their hands.
2. Most importantly, the Greek proposal does nothing to address the existent debt overhang - the one that the IMF believes cannot be addressed via enhanced 'reforms' and increased 'austerity' and requires debt haircuts. 

However, I suspect that since avoiding Grexit is now clearly Greek Government priority, and since doing the same always was and remains the EU priority, both sides will ignore the discomforts of reality. In this case, under the Bailout 3.0, Greek debt will rise (once again), Greek economy will get a negative shock of higher taxation (corporate, personal and indirect), and a large number of Greek voters will get a strong sense of having been cheated out of their 'No' votes. And then there is the risk of looming deposits bail-ins...

This can kicking will not last long...

8/7/15: Latest Round of Greece Talks: Smoke, Fire, Grexit

Summit / Eurogroup takeaways:

1. No progress of any variety beyond the usual agreement to have more talks
2. Short term deal 'weighing in' for Sunday is rumoured - effectively a bridge loan based on Greek acceptance of pre-referendum proposals. One of proposals involved a 3-4 months long bridge financing deal (Bailout 2.1) followed by 3-4 year deal (Bailout 3.0). This was rejected by Finland.
3. Any 'possible' new deal being discussed is 2-3 years in duration - a can kicking of weak variety, in other words.
4. No haircuts on debt will be allowed.
5. Sunday - full EU heads summit (not euro alone), which indicates something serious brewing - at least in terms of applying pressure on Tsipras. Also, possible Grexit push. Summit can be 'avoided' if Greece presents an acceptable plan on Thursday. Decision to be finalised on Saturday.
6. Overall, Bailout 3.0 package of measures is now being pushed out to tougher conditionality for Greece than in previous talks.
7. Juncker stated that the EU Commission has prepared a detailed Grexit plan, inclusive of humanitarian aid. Juncker plan also includes balance of payments support scheme for non-euro states with big exposures to Greek banks: Bulgaria, Romania. Big questions are also about Macedonia and Serbia.
8. At least in theory (detailed theory per Juncker) we have the end of 'irreversibility' of the euro (for now - at single state level).
9. IMF is back in the Troika 'Institutions' pairing.
10. No parallel currency discussions - left to Finance Ministers discussions.

My take: Overall, Greek position is now nearly toast. Contrary to many expectations, a No vote did not produce a stronger playing hand for Greece. Possibly because Tsipras failed to deliver any new proposals. Sunday EU Council would be required for a treaty change. This implies two possibilities: haircuts (ruled out) or Grexit. We are leaning toward Grexit, heavily.

The acceleration in Eurogroup and council demands on Greece suggests that prior to the Referendum there was already a strong consensus that Grexit is the preferred direction for further talks.

Serious sidelines:

Italy position is optimistic on the deal, but no debt relief in sight. Still remains hard-line on Greece.

Merkel takes harder stance than anyone else: strikes down bridge agreement: "Bridge financing didn't play any role in our talks tonight." Stance on conditions: "The proposals we are expecting now encompass what we put forward for second programme plus more for third programme." Haircuts: "A haircut is not up for debate. That is a bailout under the treaties and that will not happen." Merkel isn't even keen on discussing ESM programme resumption. Tougher thing still: "The situation has become much worse. I have to take 3rd programme proposals to Bundestag - hence need detail." Which means serious hurdles to cover here.

France is the lead in Greek side support and Hollande is not impressed: "It is true that if there were no agreement, the situation would be serious. Other options would have to be sought."

Spain's Rajoy "New Greek programme will have conditions attached. Will have to be approved by institutions, then Eurogroup, then leaders". Meaningless, surprisingly.

Donald Tusk: "Our inability to find an agreement may lead to the insolvency of Greece and the bankruptcy of its banking system". Says the Greek government is to present its proposals by Thursday, July 9. Juncker put deadline at 8:30 am Friday, July 10. So lots of confusion.

Finland: ruled out Bailout 3.0 for Greece on any terms.

Belgium: Finance Minister Van Overtveldt: "very disappointed" by today's Eurogroup meeting. New Greek Finance Minister made "very good explanation" of situation, but "had no new proposals to show us". "I had the strong impression that everybody really feels the sense of urgency, except the Greek government." His boss: Belgian PM Michel: has “more and more difficulty to understand the logic of Tsipras. On the one hand he says 'we want to stay in the eurozone'. On the other hand, he's not taking any initiative, zero, nothing, to stay in the eurozone.”

Lastly - a link worth reading:

7/6/15: Greece Needs a Structured Euro Exit: Sinn

As the saying goes... can't have a Greece drama without Target 2 drama... Hans Werner Sinn on Greek referendum results:

In simple terms: make Grexit. As this stage int the game, I agree - facilitated (using European financial and investment supports) exit by Greece from the euro area is the optimal resolution path to the crisis.

The arguments about new costs are irrelevant: Greek debts are currently unrepayable and will not be made good by any structural reforms. In fact, the debts are holding back the effectiveness of such reforms and will likely wipe out all and any benefits of devaluation that can be gained from conversion into drachma. Whether Greece remains in the euro area or exits, either path will require a write-down of more than 30% of Greek Government debt (my estimate - at least EUR125 billion, in line with recent IMF estimate, although my estimation is higher, since the IMF assessment was prepared prior to the Greek economy deteriorating further and the country fiscal position weakening beyond April 2015 assessments) and some additional assistance (in form of investment funds from the EU) to the tune of EUR20-30 billion over 3 years.

The write-downs should be carried out via ECB and monetised as a part of the ECB QE (wiping out the losses) so the only new call on EU funds will be investment funding. Drachma return will have to be used to carry out immediate fiscal adjustment (so there will be plenty of pain and reforms on that front).

Chart below (source: Open Europe) shows the breakdown of Greek debt by holding:

Ex-IMF official sector holdings are at 68%. IMF should, by all possible metrics, take a bath too, but it won't, so the 9% of the total liabilities held by the IMF is not at play. Banks can take a haircut, but that will require recaps (Greek banks) and/or is utterly immaterial in quantum of debt held (1% for Foreign Banks). Other bonds above are predominantly short-term stuff that can be haircut. No matter how you spin the numbers - Eurozone holdings will have to be cut by more than a half.

5/7/15: Votes are in… What’s next for Greece?

With over 75% of votes counted in the Greek referendum, 61.6% of the votes counted are in favour of 'No'.

So what's next? Or rather, what can [we speculate] the 'next' might be?

Possible outcome: Grexit

  • This can take place either as a part of an agreement between Greece and Institutions (unlikely, but structurally less painful, and accompanied by debt writedowns, a default or both), or
  • It can take place 'uncooperatively' - with Greece simply monetising itself using new currency (more likely than cooperative Grexit, highly disruptive to all parties involved and accompanied, most likely, by a unilateral/disorderly default on ECB debt, IMF debt, EFSF debt and Samurai debt. Short term default on T-bills also possible).
Either form of Grexit will be painful, disruptive and nasty, with any positive outcome heavily conditional on post-Grexit policies (in other words, major reforms). The latter is highly unlikely with present Government in place and in general, given Greek modern history.

Grexit - especially disorderly - would likely follow a collapse of the early efforts to get the EU and Greece back to the negotiating table. Such a collapse would take place, most likely, under the strain of political pressures on EU players to play intransigence in the wake of what is clearly a very defiant Greek stance toward the EU 'Institutions' of Troika. 

Key to avoiding a disorderly / unilateral Grexit will be the IMF's ability to get European members of the Troika to re-engage. This will be tricky, as IMF very clearly staked its own negotiating corner last week by publicly identifying its red-line position in favour of debt relief and massive loans package restructuring. The EU 'Institutions' are clearly in the different camp here.

EU Institutions will most likely offer the same deal as pre-referendum. Greece will be 'compelled' to accept it by a threat of ELA withdrawal, but, given the size of the Syriza post-referendum mandate, such position will not be acceptable to Greece.  In the short run, ECB can allow ELA lift to facilitate transition to new currency, but such a move would be difficult to structure (ELA mandate is restrictive) and will result in more debt being accumulated by the Greek government that - at the very least - will have to guarantee this increase.

Problem with Grexit, however, is that we have no legal mechanism for this, implying that we might need a host of new measures to be prepared and passed across the EU to effect this.

Which brings us to another scenario: Status Quo

In this scenario - no player moves. We have a temporary stalemate. Greece will be cut off from ELA and within a week will need to monetise itself with new currency. 

Why? Because July 10th there is a T-bill maturing, default on which would trigger a cascade of defaults. Then on July 13th there is another IMF tranche maturing (EUR451 million with interest). Non-payment of either will likely force EFSF to trigger a default clause. Day after, Samurai bonds mature (Yen 20bn) - default here would trigger private sector default. More T-bills come up at July 17th and following that interest on private bonds also comes up on July 19th (EUR225 million). And then we have July 20th - ECB's EUR3.9 billion due, with additional EUR25mln on EIB bonds. Non-payment here will nearly certainly trigger EFSF cross-default.

Most likely scenario here would be parallel currency to cover internal bills due, while using euro reserves and receipts to fund external liabilities. Problem is - as parallel currency enters circulation, receipts in euro will fall off precipitously, leading inevitably to a full Grexit and a massive bail-in of depositors prior to that. Political fallout will be nasty.

Most likely outcome is, therefore, a New Deal

This will suit all parties concerned, but would have been more likely if Greece voted 'Yes' and then crashed the current Government. This is clearly not happening and the mandate for Syriza is now huge. Massive, in fact. 

So there will have to be a climb-down for the EU sides of the Troika. Most likely climb-down will be a short-term bridge loan to Greece (release of IMF tranche is currently impossible) and allowing use of EFSF funds for general debt redemptions purposes. 

The New Deal will also involve climb-down by the Greek government, which will, in my view, be forthcoming shortly after Tuesday, especially if ECB does not loosen ELA noose. 

Bad news is that even if EU side of Troika wants to engage with Greece, such an engagement will probably require approval of German (and others') parliament. Which will require time and can risk breaking up already fragile consensus within the EU. In fact, only consensus building tendency in the wake of today's vote is for a hard stand against Greece. Even in an emergency, EU is very slow to act on developing new 'bailouts' - in Cypriot case it took almost a year to get a deal going. For Portugal - almost 1.5 months. Urgency is on Greek side right now, not EU's, so anyone's guess is as good as mine as to how long it will take for a new deal to emerge.

That said, short-term approach under the status quo scenario above might work, as long as:
  1. Greece engages actively, signalling willingness to deal;
  2. Greece does not monetise directly via new currency (IOUs will do in the short run); 
  3. IMF puts serious pressure on Europe (unlikely); 
  4. ECB plays the required tune and keeps ELA going (somewhat likely); and
  5. There is no fracturing of the EU consensus (if there is, all bets are off).
In a rather possible scenario, EU does opt for a new deal with Greece, which will likely involve pretty much the same conditions as before, but will rely on removing IMF out of the equation altogether. In this case, EUR28.7 billion odd of Greek debt held by the IMF gets transferred to ESM. The same will apply to ECB's EUR19 billion of Greek debt. The result will be to cut Greek interest costs (carrot), and involve stricter conditionality and cross-default clauses (stick). Euro area 'Institutions' therefore will end up holding ca 73% of all Greek debt in that case. Terms restructuring (maturities extension) can further bring down Greek costs in the short run. 

The negative side of this is that such a restructuring & transfer will be challenged in Germany and Finland, and also possibly in the Netherlands. 

It is. perhaps, feasible, that a new deal can involve conversion of some liabilities held by the euro area institutions into growth-linked bonds (I am surprised this was refused to start with) and/or a direct conditional commitment (written into a new deal) to future writedowns of debt subject to targets on fiscal performance and reforms being met (again, same surprise here). Still, both measures will be opposed by Germany and other 'core' economies. 

Either way, two things are certain: One: there will be pain for Greece and Europe; and Two: there will be lots of uncertainty in coming weeks.

As a reminder of where that pain will fall (outside Greece):
Source: @Schuldensuehner