Keeping a track of all the fluid, hourly changing developments in Greece can be unbearably complex, and as a result one may be left with the impression that things are better than they really are. They aren't. As the SocGen report below summarizes, Greece may have about 72 hours before it gives itself a Pass/Fail grade on Sunday, which in turn will have massive repercussions on the Troica bailout, on the eurozone, on the EUR, and on all those "Lehman-like" consequences you have been reading about. Once again, just like 2000 years ago, the fate of the western world (we would say democracy but that has not been the case for centuries), is about to be decided by a few popularly elected parliamentarians in Athens.
Greece: One step closer to the precipice
Greece’s sovereign crisis has reached a critical phase, and the likelihood of a disorderly outcome has risen dramatically in the last 48 hours.
Two-year Greek bond yields breached the 30% mark, while Irish and Portuguese yield spreads reached one-year highs.
In the meantime, Greek economic and fiscal data continue to disappoint, and public discontent is rising in the face of the human costs of an ever deeper economic downturn.
Against this backdrop, the backlash from yet more austerity has triggered a severe blow to the ruling Government. The catch is that the Government needs to approve the Medium Term Fiscal Plan for EU/IMF funding to be disbursed. This is looking challenging as the survival of Papandreou’s government hangs on a formal confidence vote on Sunday, and two more defections from the ruling PASOK party on Thursday depleted its majority even further.
Given these unexpected complications, the IMF is now reportedly ready to release its next quarterly instalment to Greece purely on the basis of assurance of EU funding rather than on formal conditionality, paving the way for the €12bn July tranche being disbursed. Olli Rehn stated that the deal on this payment should be forged at this Sunday’s meeting in Luxemburg.
However, even assuming that the domestic political hurdle is cleared and the €12bn loan is issued, the divide between German and French positions on private sector burdensharing is unlikely to be resolved immediately, and so the uncertainties about Greece’s longer-term funding seem destined to persist.
Indeed, the degree of private sector involvement will have a material impact on Greece’s funding needs. The IMF estimates that Greece’s financing need for the next three years amounts to €144bn in the absence of private sector involvement, but it would fall to €120bn with a “voluntary” rollover, and to around €90bn with an outright maturity extension. Ultimately, we continue to see a Vienna-style initiative as the most palatable compromise.
Politics: Irish parallel
Greece’s rising economic and social tensions have morphed into a fully fledged political crisis. Just as in Ireland at the beginning of this year, the Greek opposition is now demanding more favourable conditions than those originally signed with the EU/IMF back in May 2010. But the political situation has become extremely fragile, posing a material threat to the EU/IMF disbursement of the July tranche of the loan, and a solution to Greece’s medium-term funding gap.
Despite some reassurances from EU Commissioner Olli Rehn on Thursday evening, the formal conditions for Greece to obtain funding from the EU are under severe risk of failing, because EU funding is conditional on the Greek Parliament passing the Medium Term Fiscal Plan. A failed vote of confidence could critically derail this process. In turn, the EU/IMF programme’s fifth quarterly disbursement of €12bn is conditional on the EU providing funding for Greece over the next year. Only then will the IMF contribute its €3.3bn share of the total quarterly disbursement of €12bn. This double conditionality in principle creates a deadlock, and the Greek Parliamentary vote of confidence becomes a de facto necessary condition for cash heading to Greece in early July. Right now, the odds don’t look so good.
The vote: The odds are tight
Prime Minister George Papandreou stated that he would reshuffle his cabinet on Thursday, and demand a confidence vote in Parliament. Taking into account the three days usually required for this process, the actual voting is unlikely to take place until Sunday June 19. There is a lot at stake with this vote. A successful outcome would throw the ball back into the EU’s court, and allow the EU/IMF policymakers to proceed with devising a medium-term funding solution for Greece.
But political risks remain extremely high. PM George Papandreou’s majority is extremely narrow after two further defections on Thursday. The margin of victory may boil down to one or two votes, making the outcome virtually unpredictable at the time of writing.
Policy solutions: Two constructive developments
Notwithstanding the high hurdle posed by the vote of confidence, a legitimate question is how this policy deadlock might be overcome. There are two positive developments on this front.
Firstly, the IMF is now reportedly willing to release its next instalment to Greece purely on the basis of assurance of EU funding rather than only conditionally after formal binding commitment.
The second positive development is that Germany’s demands for private sector burden-sharing have been toned down slightly. This opens more leeway for negotiation between Germany and France, given their differences of opinion on the optimal degree of private sector involvement.
The impression is that this critical decision may be postponed to a later date.
Private sector involvement: a key divider
One possible way forward that is reportedly being evaluated is for the IMF to obtain the commitment “in principle” from the EU to meet any shortfalls in financing if a private creditor contribution cannot be agreed at a later date, but for the IMF to proceed with the disbursement anyway. But this area remains surrounded by uncertainty.
Private sector involvement makes a large difference on the aggregate funding costs
One of the few certainties is that the degree of private sector involvement could make a major difference to Greece’s financing needs.
The IMF is reported to estimate Greece’s financing need for the next three years to amount to around €144bn in the absence of private sector involvement, and to around €120bn with a “voluntary” rollover. The most effective way to reduce Greece’s financing needs would be an outright maturity extension which would limit the required financing to €90bn.
Also for these reasons, we continue to see a Vienna-style initiative as the most likely outcome as the most palatable compromise.
What to Expect from next week’s EU meetings?
Looking ahead, what seems increasingly likely is that next week’s Eurogroup and Ecofin meetings (June 20-21) are unlikely to result in a policy leap, and that the elusive “crunch time” will shifts to July 11, or quite possibly even later.
Against this backdrop, the only certainly seems that uncertainty is destined to remain high, alongside the perceived risks of contagion. Hardly a constructive environment for Europe’s highly indebted periphery.
To those who remember the Lehman trading Sunday, keep your Bloombergs close over the next 3 days. History may just repeat itself all over again.