European FinMins Douse Market's Rabid Greek Optimism

The usual mix of generalized confusion, cautiously optimistic rhetoric, and German skepticism is at play on what was supposed to be an all or nothing day for negotiations between Greece and creditors. 

According to FT, Greek officials e-mailed the wrong proposal to Brussels just after midnight (something Athens later denied) then sent a revised version just after 9:30 Monday morning. Whatever the case, the version that ended up in front of Europe’s top brass has been billed as a “step in the right direction” despite the fact that it doesn't look to contain any of the concessions previously demanded by the IMF and the EU. As a reminder, the new Greek proposal reportedly calls for the following (via Bloomberg):

  • Greek plan to unlock bailout funds includes proposal to eliminate early retirement options starting from Jan. 1, 2016, a Greek government official says, asking not to be named.
  • Plan includes levy on companies with more than €500,000 in annual profits
  • Plan includes increase in “solidarity levy” for individuals earning more than €30,000/yr
  • Creditors ask permanent fiscal measures equal to 2.5% of GDP, Greece proposes measures equal to 2%/GDP; proposes to cover difference of 0.5%/GDP with “administrative measures”
  • Greek govt would agree to target demanded by creditors for 1%/GDP primary budget surplus
  • Greek govt insists on 3 bands for VAT rates; creditors want 2 bands; Greek govt proposes to move more products to higher band of 23%, in order to cover fiscal gap
  • Greek govt has proposed zero deficit clause, debt break for Greek budget; clause would include automatic spending cuts in case threshold is breached
  • Greek govt would be willing to adopt additional fiscal measures, if agreement with creditors includes commitment to debt relief

And as EU officials convene for today’s emergency summit (where it now appears everyone will once again agree to meet again in the coming days to ‘finalize’ things), money continues to flow out of Greek banks with Reuters reporting that pre-orders for withdrawals topped €1 billion over the weekend. Of course, Greek banks are out of cash, so meeting today’s withdrawals necessitated yet another ELA cap increase from the ECB. That makes three ELA hikes in four trading days. Estimates vary, but it’s not at all clear how much longer this can go on, given Greek banks’ pledgeable collateral. Depending on how one views the ECB’s stance on allowing the banks to pledge government guaranteed, unsecured debt, the banking sector may have anywhere between €30 billion (haircut inclusive) and zero in collateral remaining on the books. Even in the best case scenario, banks have but a few weeks left given the current run rate. Here’s Goldman:

The ECB continues to keep a close check on its provision of liquidity to the Greek banks via Emergency Liquidity Assistance (as collateral under standard refinancing operations has been exhausted). Over past weeks, the progressive increase in ELA matched the rapid outflow of deposits. If no progress is achieved today, it is likely that the ECB will put a cap on further liquidity assistance, possibly as early as tomorrow, Tuesday. This would force the Greek central bank to ask the Greek government to impose controls over withdrawals, de facto halting the creation of EUR ‘base money’ in Greece. 

Germany, likely aware that each euro banknote dispensed at a Greek ATM effectively raises Greece’s liability to Berlin, is calling for the ECB to stop raising the ELA cap. Here’s more via Bloomberg:

Christian Social Union finance committee member Hans Michelbach and Social Democrat deputy parliamentary head Carsten Schneider are among German lawmakers who want to stop Emergency Liquidity Assistance for Greek banks, Spiegel reports, citing interviews with the politicians.


ELA gives Greece more leeway to negotiate, politicians say


ELA creates a “fiction of Greek banks’ solvency”

Meanwhile, the German and Finnish finance ministries have been quick to dismiss the notion that today's summit will bring any sort of breakthrough. In fact, German FinMin Wolfgang Schaeuble sees virtually nothing new in the 'revised' Greek proposal and Austrian FinMin Alexander Stubb says the entire idea of a Monday deal has been blown out of proportion and everyone in attendance has "wasted" their frequent flier miles:

“It’s not possible to prepare a statement for the euro summit, the status is unchanged since last Thursday. We don’t have anything new except that over the weekend many have tried to publicly raise expectations, which however aren’t backed up by facts. Without substantial proposals that can be seriously reviewed, we can’t reliably prepare a summit,” Schaeuble says.

“I don’t think there will be any form of a breakthrough today because there’s no official paper on the table. Negotiations or discussions will actually be quite short,” Stubb says to reporters in Brussels before meeting of euro-area finance ministers. “I have low expectations of an outcome and I think those expectations have been raised way too high.” Stubb says he fears “a lot of air miles have been wasted” today.


So, while the politicians do what politicians will do (i.e. lie when it "becomes serious"), those who have a predisposition towards pragmatism are indicating that Monday's 'emergency' summit is nothing but a media spectacle that will produce nothing in the way of concrete results and is likely only good for giving the algos a few headlines to chase. That's bad news for Greek banks because with the ECB now deciding on a daily basis whether they want to keep the doors open and the ATMs plugged in, can kicking (Merkel now says officials will likely need a few more days to make a decision) is a dangerous game to play:


"ELA runs precisely for one day because there is a summit meeting (of leaders) to deal with the Greek question."

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As has been the case at many a 'final', 'last ditch', 'emergency' Grexit summit, all of the rheotric and ridiculous back-and-forth can be summed up in just two pictures: