Greek Bond Yields Tumble After Euro Zone, IMF Agree On "Common Stance"

Update: It appears expectations of an imminent deal may be premature, because this just hit the tape:

  • GREEK OFFICIAL SAYS NO BAILOUT DEAL EXPECTED IN MEETING TODAY.

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In a welcome sign the latest conflict between the troubled Greece's lenders may be thawing, Reuters reports that Euro zone creditors and the International Monetary Fund have agreed between themselves to present a common stance to Greece later on Friday in talks on reforms and the fiscal path Athens must take, euro zone officials said. 

As reported earlier this week, a united stance among the Troika would be a breakthrough because the two groups have differed for months on the need to reduce the "explosive" Greek debt burdern and the size of the primary surplus Greece should reach in 2018 and after. Those differences have hindered efforts to unlock further funding for Greece under its latest euro zone bailout program. The IMF hasn’t signed Greece’s third bailout package, but Germany-led eurozone lenders want the IMF to rejoin the bailout as a lender.

"There is agreement to present a united front to the Greeks," a senior euro zone official quoted by Reuters said, adding that the outcome of Friday's meeting with the Greeks was still unclear and it was unclear if Athens would accept the proposals. "What comes out of it, we will see," the official said.

Jeroen Dijsselbloem, the chairman of euro zone finance ministers, said in The Hague that Friday's meeting, in which Greek Finance Minister Euclid Tsakalotos will take part, was to discuss the size of Greece's primary surplus. While the euro zone, or rather mostly Germany, wants Greece to reach a primary surplus of 3.5% of GDP and keep it there for many years, the IMF believes that with reforms in place now Greece will reach only 1.5% and has been pushing for Athens to legislate new measures that would safeguard the agreed euro zone targets.

 

Officials said the lenders would ask Greece to take 1.8 billion euros worth of new measures until 2018 and another 1.8 billion after 2018, focused on broadening the tax base and on pension cutbacks.

Meanwhile, the Greek Syriza government, elected to fight against lend-imposed austerity, has been loathe to make more cuts that will hit its battered citizens. Lenders have previously accused Greece of stalling on previously agreed upon reforms which, like in the past, have not been implemented.

As such, the Greek response remains the big wildcard. As the WSJ adds, if Greece accepts the proposal, representatives from the institutions could return to Athens as soon as next week and sort out the details, before a meeting of eurozone finance ministers on Feb. 20. Several Greek officials told the WSJ that the Greek government would be willing to make fiscal concessions for after 2018 if it misses fiscal targets.

But the Greeks want a “comprehensive agreement” that would include a clearer description of the country’s fiscal path, enough to make Greek bonds eligible for the ECB’s QE program. However, in an ongoing multivariable hurdle, the ECB has said Greek bonds would only be eligible for its quantitative-easing program if the current review of Greece’s bailout is completed and an agreement to restructure the eurozone’s loans to Athens removes concerns about the sustainability of the country’s high debts.

Until now, Germany has been insisting on a two-step sequence, in which Greece first signs up to more austerity before Berlin sits down with the IMF to see how much debt relief is still necessary.

 

Greece’s Economy Minister Dimitri Papadimitriou has called all sides to offer something at the same time, in order for an agreement to be reached. “Negotiation is like dancing the tango: you need both and who would make the first move is not clear,” he said.

The good news for Greece is that it doesn’t urgently need bailout cash until large debt falls due in July.

But all sides would prefer to reach an agreement before Europe’s attention shifts to its packed domestic political calendar, which includes elections in the Netherlands, France and Germany.

While the latest Greek crisis is still far from resolved, markets took heart from the news, and as a result Greece's two-year bond yield tumbled 130 basis points to 8.7% after rising above the 10% mark on Thursday as worries about the bailout drove away buyers from Greece's illiquid paper.

Finally, should negotiations fall apart, here again is a simply breakdown of the five scenarios facing Greece courtesy of Credit Suisse:

As of this moment, there is little clarity on what happens next. A recent report from Credit Suisse laid out five possible scenarios, ranging from the benign to the horrific, as follows:

  • Scenario 1:Quick resolution (in the coming days)
  • Scenario 2: “We need more time” (March-April)
  • Scenario 3: brinkmanship (July)
  • Scenario 4: Early elections (before the summer)
  • Scenario 5: Grexit? Oh pleeease!

A timeline of key events in the coming weeks will help investors as they gauge the risk of yet another Grexit: