If anyone has a clear idea what is going in Europe, you are smarter than us, and may move on to a different post. For everyone else, here is a must read piece from SocGen that tries to make sense of what is rapidly becoming the biggest clusterfuck in modern European history, in which everyone hates the outcome that is predetermined by the bankers, yet nobody knows just how to achieve it.
Courtesy of SocGen's James Nixon.
The initiative now lies with Greece
The morning after the night before; or is anyone really sure what has been agreed so far by the Eurogroup over the last two days. How much one wonders is an agreement "in principle" actually worth? This being Europe details of the plan continue to emerge from disparate sources. It’s now clear that some of the ideas discussed by in March have re-emerged. Hence the effective lending capacity of the EFSF is to be increased to its full €440bn by increasing the government guarantees from 120% to 156%. At the same time, in an attempt to make it easier for Greece, Ireland and Portugal to issue debt in their own name, the Eurogroup has agreed that ESM financing to these three countries will not be senior to existing debt. Beyond these initiatives, the two hurdles to a new Greek bailout remain agreement on the exact form of private sector involvement and getting the Greek parliamentary approval for the latest round of austerity measures.
On the former, German Finance Minister Wolfgang Schäuble has indicated that he wants to open discussions with private creditors to secure their contribution. This hints that Angela Merkel’s much trumpeted compromise with Nicolas Sarkozy on Friday is less than a complete capitulation. Weekend press reports suggested that Mr Schäuble intends to pitch a "compromise" to the ECB which would see the EFSF issue debt which could be offered to the Greek banks. This would be consistent with the efforts to re-dimension the EFSF and earlier hints that the lion’s share of any private sector contribution would fall to Greek banks. Of course, how the ECB views this compromise remains to be seen; certainly the idea of the Greek banks taking on new debt that they can post as collateral at the ECB smacks of monetising debt. Mr Schäuble said on Monday that no "additional incentives" are needed to get investors to contribute voluntarily to a new aid package for Greece. "The incentive lies in the fact that everybody, especially creditors, has an interest in a good, stable development," Mr Schäuble told reporters after the meeting. "And because they have an interest, they also have a joint responsibility and that does not require additional incentives."
What is so surprising is how much the Eurogroup appears to have handed the initiative to Greece itself; if the Government falls after Tuesday’s vote of confidence presumably we reach the point where the crisis starts to get really sporting. And, if there weren’t hurdles enough, the latest from Mr Papandreou is a referendum on the whole kit and caboodle in the autumn. The risk for the Eurogroup is that the gambit of pressuring Papandreou may now backfire with some of the Greek press seeing this as a full frontal attack on the PM. In many respects the situation in Greece very closely mirrors the political situation in Portugal. The right-wing business orientated opposition is unhappy that their spendthrift socialist government still haven’t bitten the bullet and undertaken root and branch reform of the public sector. Hence Mr Papandreou continues to rely too heavily on hypothetical increases in tax revenue rather than wield the axe over his own supporters. As in Portugal, the opposition may be prepared to bring down the government over this if they can and force new elections. This would leave the Eurogroup having to negotiate with the different political parties in Greece in order to secure agreement on further austerity.
There will now be another extra-Eurogroup meeting on 3 July with the aim of finally agreeing a new Greek package conditional on Greece having finally passed its Medium Term Fiscal Strategy. Parliamentary approval of new deficit cutting measures and of the privatization plan would "pave the way" for the disbursement by mid July of the next €12bn tranche of bilateral lending to Greece. In the interim European Commission and Central bank officials alongside the IMF will be back in Athens this week to draw up a "memorandum of understanding" with
the Greek government – providing it survives the vote of confidence on Tuesday. The Greek parliament will vote though the Medium Term Fiscal Strategy based on the "memorandum of understanding" on or around June 28.