By now it should be painfully clear to involved that the Greek economy is nothing but a zombie, whose funding shortfalls and other deficit needs are sustained each month only courtesy of constantly new and improved "financial engineering" ponzi creations out of the ECB, the ELA, and other interlinked funding mechanisms which are merely a transfer of German cash into empty peripheral coffers. And while the attention of the world has moved on, at least for the time being, from the small country which has been left for dead with the assumption that Europe will do the bare minimum to keep it alive, but not more, Greece once again reminds us that not only does it still pretend to be alive, but that the zombie is getting hungry, and want to eat.
The latest news out of Athens is that ahead of the Samaras’ meeting with Juncker tomorrow and Merkel on Friday, the Troika is said to have found that Greece’s funding shortfall could be as high as EUR14bn, or 20% more than previously "agreed upon."
Spiegel reports [11]:
Athens has not been having an easy time coming up with the €11.5 billion in cost cutting measures over the next two years it has promised Europe. Indeed, Greek Prime Minister Antonis Samaras is reportedly set to request an additional two years to make those cuts during meetings later this week with German Chancellor Angela Merkel on Friday and French President François Hollande on Saturday.
But according to information obtained by SPIEGEL, the financing gap his country faces could be even greater. During its recent fact-finding trip to Athens, the so-called troika -- made up of representatives from the European Central Bank, the European Commission and the International Monetary Fund -- found that Greece will have to come up with as much as €14 billion to meet the terms for international aid.
According to a preliminary troika report, the additional shortfalls are the result of lower than expected tax revenues due to the country's ongoing recession as well as a privatization program which has not lived up to expectations. The troika plans to calculate the exact size of the shortfall when it returns to Athens at the beginning of next month.
The news of the potentially greater financing needs comes at a sensitive time for the country. Many in Europe, particularly in Germany, are losing their patience and there has been increased talk of the country leaving the common currency zone. Over the weekend, German Finance Minister Wolfgang Schäuble reiterated his skepticism of additional aid to Greece. "We can't put together yet another program," he said on Saturday, adding that it was irresponsible to "throw money into a bottomless pit."
This was confirmed by Kathimerini [12]which said that Greece is preparing a plan for €13.5bn cut instead of the €11.5 billion demanded by the troika. This is because the Finance Ministry has calculated that once the pension and salary cuts are implemented along with the reductions to spending, tax revenues and social security contributions will fall by about 2 billion euros, leading to a new shortfall said the article DB summarizes. Elsewhere Germany's foreign minister Guido Westerwelle said that the German government is convinced "no substantial softening of the agreement" with Greece is possible.
So will Europe continue on its merry way, pretending Greece does not exit, as evey month the insolvent country takes out of a few extra billion from the piggybank (thank you Dzyrmany [13]), or will Europe finally admit reality, and sever ties with the Greek monetary black hole, as so many Germans now openly want? Citi's Stephen Englander explains under what conditions the latter might happen.
Linking ECB bond buying to Greek exit
An article in Der Spiegel over the weekend discussed a potential ECB intervention to cap peripheral bond yields. A more recent report sent out overnight shifted gears in addressing how the Eurozone prevents contagion in the event of a Greek exit. Dealing with Greek exit could be the more pressing Eurozone issue, because contagion has to be stopped on the spot if Greece leaves, or tremendous damage will be done. A couple of months of excess financing costs are not pleasant, but are not fatal either, as German policymakers have been at pains to point out. Several clients have suggested as well that the ECB bond buying discussion may be more motivated by Greece than by Spain, even if it could be justified by either.
The article raises three possibilities for dealing with Greek exit: 1) unlimited ECB buying, 2) an ESM banking license, and 3) Eurobonds. The argument is that if Greece is exiting you need an unbeatable policy recipe to prevent contagion or else you end up with the kind of financial market panic that the US did when Lehman’s went bankrupt without adequate policy preparation for dealing with the aftermath. Nevertheless, as the article notes, each policy has side effects and can affect incentives in an undesirable way. The big bazooka metaphor is wrong – the battle is not won by the biggest bazooka, but by the one that has unlimited ammunition.
The open questions are:
- Would the Europeans let Greece exit without the type of safety net discussed above?
- Is there a way they can keep Greece in without other countries lining up for similar treatment, leaving Stability and Growth Pact –II where SGP-I ended?
- If they had to choose between the ECB, ESM and Eurobonds, which would allow the most conditionality and least distortion of incentives?
- How would the euro react?
It seems to me that i) would be unambiguously and harshly negative for the euro, because the risk of contagion is enormous if depositors in other peripheral countries feel that official reassurances are not adequate in the absence of an impregnable safety net, and if investors feel there is any ambiguity in the ring-fencing of all other Eurozone countries. Letting Greece exit without a certain ring fence is imprudent, so probability has to be concentrated around keeping Greece in or letting it go but having a ring fence, although the possibility that there is a policy miscalculation and Greek exit without an adequate ring fence cannot be ignored .
The realistic answer may be that Greece should be financed because it is too small to matter. However, it is too easy to say the EUR does well if they eliminate the Greek tail risk and, by inference, the tail risk pertaining to more deserving peripherals. Convincing other countries that have complied much more seriously with austerity demands, and who face the political and social downside of austerity, that they will not be granted the same indulgence as Greece, may be more difficult. So we may end up with a euro zone that is perpetually on the brink with perpetual threats that one country or another will be tossed or leave for noncompliance on fiscal matters. This situation would seem to merit a more than modest risk premium on the currency.