Greek default necessary but Grexit is not

by Wolfgang Münchau

Financial Times
April 19, 2015

Until last week, discussions with Greece did not go well. That changed when the circus of international financial diplomacy moved to Washington for the spring meetings of the International Monetary Fund and the World Bank. Then it became worse.

My hunch is that this show will go on for quite a while. The Greeks want to merge the talks on the extension of the current, second, loan programme with the talks on the new third one. For that to work they will require temporary bridging finance to get through the summer. This sounds like somebody has a plan. But this is not my impression. I have never seen European finance officials so much at a loss.

The big question — whether Greece will leave the eurozone or not — remains unanswerable. But I am now fairly certain it will default.

My understanding is that some eurozone officials are at least contemplating the possibility of a Greek default but without Grexit. The complexity is severe, and they may not have had the time to work it out. But it may be the only way to avert utter disaster.

On whom could, or should, Greece default? It could default on its citizens by not paying public-sector wages or pensions. That would be morally repugnant and politically suicidal for the Syriza-led government. In theory, it could default on the two loans it received from its EU partners, though it is not due to start repaying the first of those until 2020, and the second in 2023. It could also default on the remaining private-sector bondholders but that would not be a good idea. Greece might need private sector investors later.

More

How to deal with a problem child like Greece

by Chris Giles

Financial Times
April 19, 2015

Never in the history of the eurozone has the eurogroup been so united. Never have the institutions formerly known as the troika — the European Commission, the International Monetary Fund and the European Central Bank — had such a common purpose. Whether by design or by accident, the Syriza government led by Alexis Tsipras has achieved more European harmony than a collection of continental choirs singing Ode to Joy. Everyone is deeply frustrated by the antics of Greece.

The issue dominated the spring meetings of the IMF and World Bank in Washington. European officials spoke of their incomprehension that Yanis Varoufakis, Greece’s finance minister, has not engaged with technical talks to change the terms of the country’s lending conditions.

Success would unlock €7.2bn of additional finance necessary to keep Greece from running out of money. The IMF and European officials issued a common message that the detailed talks must speed up or the chances of a default were high. Without agreement, the loans would remain under lock and key.

No one understands Greece’s behaviour in shunning the talks since an outline deal was agreed in February. They call it childish. Many say privately that the Greek authorities are behaving like a toddler having a tantrum. It’s unacceptable, they say. But just as parents often differ on the best way to quieten their screaming offspring, European harmony does not extend to agreement on the best strategy for dealing with the Greek government.

More

ECB’s Draghi Rejects Talk of Greek Euro Exit

Wall Street Journal
April 18, 2015

European Central Bank President Mario Draghi on Saturday rejected speculation that Greece may be forced to abandon the euro, reiterating that Europe’s single currency is irrevocable.

At a news conference during meetings here of the world’s top finance officials, Mr. Draghi said he stood by a comment he made in 2012 that the euro “cannot be reversed.”

The risk of a Greek exit appears to be rising, as a stalemate between Greece and its creditors over emergency financing drags on with some big bills due for Athens in the coming weeks.

Despite the urgent circumstances, the International Monetary Fund’s Managing Director Christine Lagarde on Saturday said she had learned little new in talks with Greek Finance Minister Yanis Varoufakis last week, and urged him promptly to submit a detailed proposal for a fresh bailout.

More

Draghi warns of ‘uncharted waters’ if Greece crisis deteriorates

Financial Times
April 18, 2015

Mario Draghi said the euro area was better equipped than it had been in the past to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.

The European Central Bank president called for the resumption of detailed discussions aimed at resolving the country’s debt woes and urged the Greek authorities to bring forward proposals that ensured fairness, growth, fiscal stability, financial stability.

Asked about the risks of contagion from a new flare-up in Greece, he said: “we have enough instruments at this point in time . . . which although they have been designed for other purposes would certainly be used at a crisis time if needed.”

The two tools he referred to were the ECB’s so-called outright monetary transactions, which have never been used, and Quantitative Easing, which the ECB launched in January. He added: “we are better equipped than we were in 2012, 2011 and 2010.”

However Mr Draghi added: “Having said that, we are certainly entering into uncharted waters if the crisis were to precipitate, and it is very premature to make any speculation about it.”

More

IMF Official Sees Greek Bailout Needing Several More Weeks of Talks

Wall Street Journal
April 17, 2015

Negotiations over fresh emergency financing for Greece are likely to take several more weeks, even though the cash-needy government in Athens requires a deal to help it meet a big increase in debt payments due in June, a senior International Monetary Fund official said Friday.

The IMF official’s comments come as the U.S., worried that Greece’s worsening financial crisis could spell trouble for a fragile global economy, urged Greek officials in private meetings to reach a deal that would satisfy Athens’ creditors.

“There’s no time to waste,” U.S. Treasury Secretary Jacob Lew said after a meeting with Greek Finance Minister Yanis Varoufakis. “If there is a crisis, it will first hit Greece, and it will hit the Greek people very hard. But it is something that the European and global economy doesn’t need, to have another crisis.”

More

ECB’s Nowotny: ELA Can’t Be Long-Term Financing Substitute for Greek Banks

Wall Street Journal
April 17, 2015

European Central Bank governing council member Ewald Nowotny said Friday the central bank’s emergency-lending program can’t become a long-term financing mechanism for Greek banks.

“Due to the legal structure, the ECB isn’t in the situation to substitute long-term financing, that’s a political decision,” Mr. Nowotny said at the International Monetary Fund’s Spring Meetings.

“If a decision [on a program for Greece] doesn’t come about, the ECB can’t replace it, we’re not a replacement for a politically-decided program,” Mr. Nowotny said. The ECB can only offer emergency-liquidity assistance, or ELA, to solvent banks, and the Greek banks currently receiving it can’t increase their exposure to Greek government debt.

More

Greece's big nowhere

by Theodore Pelagidis

Brookings Institution
April 17, 2015

Syriza will eliminate the primary budget surplus and cease or reverse the privatization efforts of the Samaras government, the cost of which for 2015 alone would be around 8 billion euros. Meanwhile, bond maturities in 2015 will reach almost 25 billion euros. Since most of the maturities are held by state entities, one should not discount the possibility of either a violent ‘Grexit’ from the euro or, conversely, a long transition to some kind of normality that will unfortunately kill any hope of an imminent ‘Grecovery.’

- My January 5 blog post, Greece in 2015: Assessing the 'Syriza' Political Risk

Syriza’s behavior is unpredictable….What comes next might be something far worse than a nightmare.

- My January 28 blog post, Greece’s New Government: Empty Pockets and Empty Promises

The nightmare is here

What is the current situation of the Greek economy? GDP is about to contract again after an increase of 0.6 percent in 2014 fuelled by tourism and an increase of private consumption of around 1.5 percent. Employment, after an increase of 0.6 percent in 2014, seems to be falling again, and the primary budget surplus has evaporated in a three month period.

There is no doubt that the political risk has killed the (albeit anemic) 2014 recovery. It has also destroyed the troika program. However, polls show that people seem to be still relatively happy with a government that is said to play hard ball with the Europeans and the IMF—but the honeymoon is very close to being over. People are beginning to understand that the postponement of the drama—i.e, painful short-term reforms—will only make the end even worse. This is not even mentioning the possibility of an economic disaster such as a “Grexit,” meaning that the poor will first and foremost pay a heavy price. In any case, sooner or later, the Greeks will have to face the reality and, after calculating real costs and benefits, will possibly show in the polls a more cool-headed view about the future of the country. In the meantime, the pretending-to-be-cool government is serving IMF liabilities and Treasury bill redemptions by using cash from pension funds, counties, and public organizations, ironically making a future possible default much more painful and disastrous. As time passes by, it becomes evident that behind the government’s frozen smiles, the country is going nowhere. And the creditors have finally got it.

More

ECB examines possibility of Greek IOU currency in case of default

Reuters
April 17, 2015

The European Central Bank has analyzed a scenario in which Greece runs out of money and starts paying civil servants with IOUs, creating a virtual second currency within the euro bloc, people with knowledge of the exercise told Reuters.

Greece is close to having to repay the International Monetary Fund about 1 billion euros in May and officials at the ECB are growing concerned.

Although the Greek government has repeatedly said that it wants to honor its debts, officials at the ECB are considering the possibility that it may not, in work undertaken by the so-called adverse scenarios group.

Any default by Greece would force the ECB to act and possibly restrict Greek banks' crucial access to emergency liquidity funding.

More

Greece: Decision time

by Tony Barber & Kerin Hope

Financial Times
April 17, 2015

Below the walls of the Greek parliament, on the spacious, sloping square of Syntagma in central Athens, the most unusual public protest of the Syriza era took place on Thursday.

When it is not lecturing European countries on their mishandling of the euro crisis — a crisis that, as every day passes, is bringing Greece closer to a debt default — the nation’s ruling radical leftist party likes to portray itself as the champion of the proletariat and the defender of the oppressed on home soil.

But Thursday’s protest told a different story. Waving flags and dressed in hard hats and luminous yellow jackets, a couple of thousand demonstrators from northern Greece — gold mine workers, accompanied by families and friends — spread out across Syntagma.

After a 14-hour bus journey they had arrived in Athens to demonstrate against the government’s suspension of one of the Canadian-owned mine’s operating licences. The miners suspect that the measure, ostensibly adopted on environmental grounds, is politically motivated and will cost them their jobs. “We think it’s unfair and illegal,” says Dimitris Ballas, a geologist at the mine.

The rally was the first sizeable anti-government protest since Syriza swept to electoral victory on January 25. It indicated that Greeks, if they feel mistreated or misgoverned, will turn against the political upstarts of Syriza just as they turned against the traditional parties of left and right whose misrule pushed Greece to the abyss.

More

Big improvement in the Greek primary budget

by Silvia Merler

Bruegel
April 17, 2015

Ahead of what promises to be a very tense negotiation period, the Greek Ministry of Finance released the preliminary budget execution data for the first three months of 2015. The State primary budget is reported to considerably exceed expectations, due to both expenditures below target and revenues picking up.

The coming month promises to be very tense for Greece, as negotiations seem to proceed slowly and payment deadlines are approaching fast. The Eurogroup is due to meet next week, on April 24th, to discuss the Greek reform list that will be the basis for the final programme review and that must be agreed by the end of April, according to the terms of the 20th February agreement. Agreeing on a reform list is paramount for Greece to be able to unlock some of the frozen funding of the programme and relief the cash issues.

However, EU policymakers sound increasingly skeptical about the possibility that a deal can be reached on the 24th. Germany’s Finance Minister Schauble reportedly said “nobody expects there will be a solution” next week, while EC Vice President Dombrovskis also ruled out an agreement and said the meeting is most likely going to be just an assessment of the progress in talks with Greece. If no agreement is reached on 24th April, then the discussion would shift to the Eurogroup on May 11th, just ahead of a 750 million repayment due to the IMF the 12th May (see here for the detailed repayment schedule).

More

Greek Officials Ponder Life Without the Euro

Bloomberg
April 17, 2015

With Greek officials hinting they could be forced from the euro and the country’s creditors growing frustrated with the government’s foot-dragging, analysts are asking what might happen if talks break down.

German officials are “taking just about everything into consideration,” Finance Minister Wolfgang Schaeuble said in an interview this week as he urged Greek leader Alexis Tsipras to stop offering his people false hopes. Economists such as UniCredit Bank AG’s Erik Nielsen say it may be just a matter of time before Tsipras’s cash supplies run out and he’s forced to print a new currency.

Adopting the euro was always supposed to be a one-way ticket, so there is no legal precedent or political roadmap for an exit. If you’re waiting for a formal announcement of a clear resolution, you may be waiting a long time.

Next steps for Greece range from retaining the euro to catastrophic divorce; half-measures like having multiple currencies circulate, with aid recycled to repay foreign-currency debts, are also in the cards.

Equally unclear is who would tell the world -- and how -- that Greece has entered an economic afterlife. Possible messengers include Tsipras, the European Central Bank, European Union President Donald Tusk and European Commission President Jean-Claude Juncker, among others.

More

Greece Creditors Grim on Prospects of Deal

by Marcus Walker

Wall Street Journal
April 16, 2015

Greece’s international creditors signaled they are losing hope that Athens will do what is needed to unlock bailout funds before it runs out of money, and Greek government bond prices plunged as concerns rose about default and an exit from the eurozone.

The European Union’s executive arm, which helps oversee Greece’s bailout, said it is “not satisfied” with the slow progress in talks, while Christine Lagarde, the managing director of the International Monetary Fund, another key lender,said Greece needs to “get on with the work” of fixing its economy. Ms. Lagarde said Thursday she has warned Greece against postponing loan payments, a prospect people familiar with the matter said Athens informally explored.

Policy makers across the euro currency zone are bracing themselves for brinkmanship in coming weeks that could lead to a resolution—of one kind or another—but only in the face of further political and financial turmoil. “Greece is moving ever closer to the abyss,” Slovakia’s Finance Minister Peter Kazimir said this week.

More

Don’t Blame Germany for Greece’s Profligacy

by Jeremy Bulow & Kenneth Rogoff

Wall Street Journal
April 16, 2015

In the court of world opinion, a large majority seems to believe that even if the Greeks may have been a tad fiscally irresponsible, it is the Germans who have driven Greece into depression through cruel insistence on austerity and debt repayments.

This populist narrative misses the essence of the problem: The Greeks are experiencing an emerging-market debt crisis, albeit one on steroids. Those convening in Washington, D.C., this week for the spring meeting of the International Monetary Fund might want to keep in mind that Greece’s problem is not simply the straitjacket of the single currency. The euro has fallen by 13% over the past year against an effective index of eurozone trading partners, yet Greece is hardly booming.

The deeper issue is that European integration by design has reduced the independence of European Union member states legally, fiscally and politically. Interdependence helped Greece run up debts far in excess of a normal advanced emerging-market country, but it is now making these debts devilishly difficult to unwind.

More

Christine Lagarde dashes Greek hopes on loan respite

Financial Times
April 16, 2015

Christine Lagarde, head of the International Monetary Fund, dashed Greece’s hopes of grace periods for loans it is due to repay next month, saying precedents were “not followed by very productive results”.

Greek bond yields soared on Thursday after the Financial Times revealed the news of the IMF’s stance. Returns on the July 2017 bond rose 202 basis points to 26.2 per cent, the highest since the country’s restructuring. Its 10-year bond yields climbed 70 basis points to 12.4 per cent.

The revelation that Greece had explored the possibility of a grace period highlighted the parlous state of its public finances and international uncertainty about whether it will default on a €747m payment to the fund, due on May 12.

Speaking at the IMF’s spring meetings in Washington, Ms Lagarde confirmed that she explained the fund’s policy of refusing requests for a delay to Yanis Varoufakis, the Greek finance minister, after Athens made an informal approach this month for more time to pay. Mr Varoufakis has denied that he made such a request.

More

Europe Braces for Brinkmanship Over Greece as Country Moves ‘Ever Closer to the Abyss’

by Marcus Walker

Wall Street Journal
April 16, 2015

Europe is losing hope that Greece will adopt the economic policies needed to unlock bailout funds before it runs out of money.

Policy makers across the euro currency zone are bracing themselves for brinkmanship in coming weeks that could lead to a resolution—of one kind or another—but only in the face of further political and financial turmoil in Greece.

“Greece is moving ever closer to the abyss,” Slovakia’s Finance Minister Peter Kazimir said this week. Financial markets seem to agree: Yields on Greece’s three-year bonds shot up to nearly 28% on Thursday as investors priced in a high chance of default.

The eurozone usually avoids the abyss at the last minute through what it does best: political fudges.

More

Greek Government Bonds Plunge

Wall Street Journal
April 16, 2015

Greek government bonds plunged Thursday, shaken by swelling fears that the beleaguered country will be forced into a default.

Yields on the country’s two-year bonds soared by more than 4½ percentage points on the day to above 27%—their highest since being issued and a massive jump even for notoriously volatile Greek debt. Yields rise when prices fall.

On the country’s 10-year debt, meanwhile, yields advanced more than one percentage point to a shade over 13%—their highest in more than two years.

An inverted yield curve, where shorter-term debt yields more than longer-dated bonds, is a classic signal that investors see a very high risk of default.

“Overall the probability of a Greek exit [from the euro] remains higher now than it ever was,” economists at Barclays wrote in a note. Others warned that a default or an exit from the euro could spark a wave of volatility across other Southern European countries, such as Spain, Italy and Portugal, that were hit hardest during the height of the eurozone crisis.

More

Greece's debt crunch: Sorry, no extensions

Economist
April 16, 2015

That Greece is becoming increasingly desperate in its search for funds to pay its creditors is well known, but Thursday’s news from Washington was striking nonetheless. Sources at the International Monetary Fund, the Financial Times reported, confirmed that Greek officials had asked whether it would be possible to postpone the country’s repayments to the group, which amount to €2.5 billion ($2.7 billion) in May and June. The IMF turned Greece down unconditionally. But the request showed that the Greek government itself is no longer confident it will be able to agree with creditors on reforms in time to unlock the bail-out funds it needs to avoid default. With Greece’s mercurial finance minister, Yanis Varoufakis, arriving in Washington today for the spring meeting of the IMF, the country seems to be edging ever closer to disaster.

The inquiry about delaying payments to the IMF was typical of the unpredictable behaviour of Greece’s new government, led by the leftist Syriza party. Within the Eurogroup of euro-zone finance ministers, the Greeks’ shifting demands and failure to respect confidentiality have destroyed their credibility. Other members have largely given up trying to understand Greek aims, and are instead setting conditions. On Wednesday Germany’s hard-line finance minister, Wolfgang Schäuble, demanded that Greece stop deluding its people and implement tough reforms quickly, saying the solution to the impasse was “entirely down to Greece”. The president of the European Central Bank, Mario Draghi, struck a similar note in a press conference the same day. Asked how long the ECB could continue to provide the emergency liquidity assistance (ELA) that is keeping Greece’s banks afloat (see chart), he said that was “entirely in the hands of the Greek government”, which needed to resolve its negotiations with the EU.

More

Will natural gas cooperation with Russia save the Greek economy?

by Simone Tagliapietra & Georg Zachmann

Bruegel
April 16, 2015

In the midst of profound turbulence in the negotiations between Greece and its international lenders, Prime Minister Alexis Tsipras flew to Moscow last week for an official visit to President Vladimir Putin. This meeting, portrayed by many commentators as a bargaining chip with its European creditors, was officially intended to improve bilateral relations between the two countries in various economic sectors. Greece had high expectations from this meeting, in terms of financial assistance, potential gas discounts and a lift of the Russian ban on the food imports from Greece.

However, during the press conference that followed the meeting it emerged that Russia had something else to offer to Greece: strong cooperation on natural gas projects. This prospect was presented by President Putin as a sort of potential game changer for the Greek economy. Firstly, he stated that Greece could earn "hundreds of millions of euro" through natural gas transit annually. Secondly, he declared that Greece could use these revenues to pay off its debt to international creditors. Prime Minister Tsipras reacted favourably to this proposal, by saying that this might also boost jobs and investment in Greece. But is there any evidence that a strong natural gas cooperation with Russia would have a considerable impact on the Greek economy? This blog is intended to provide insight on this controversial issue.

During the press conference, President Putin declared that Russia would consider the option of providing loans to Greece for joint large-scale natural gas projects. This was a reference to Turkish Stream, a project launched in December 2014 by the Russian President himself, intended to deliver substantial volumes of Russian gas to Turkey and Europe while completely bypassing Ukraine from 2019.

More

Greek PM Tsipras confident of EU deal despite friction over reforms

Reuters
April 16, 2015

Greek Prime Minister Alexis Tsipras told Reuters on Thursday he was "firmly optimistic" his government would reach an agreement with its creditors by the end of April despite friction over issues such as pension and labour reform.

In a statement, Tsipras said several points of agreement had been found since talks first started, especially on areas such as tax collection, corruption and distributing the tax burden towards those who most able to pay.

But he acknowledged that the two sides disagreed on four major issues: labour rules, pension reform, a hike in value-added taxes and privatisations, which he referred to as "development of state property" rather than asset sales.

More

IMF knocks Greek debt rescheduling hopes

Financial Times
April 16, 2015

Greek officials have made an informal approach to the International Monetary Fund to delay repayments of loans to the international lender, highlighting the parlous state of Greek finances, but were told that no rescheduling was possible.

According to officials briefed on the talks by both sides, Athens was persuaded not to make a specific request for a delay to the Fund, which is owed almost a €1bn in two separate payments due in May.

Although Athens was rebuffed, the discussions, which occurred in private earlier this month, are a sign that the Greek government is finding it increasingly difficult to scrape together enough money to continue to pay wages and pensions while meeting its debt payments to external lenders.

Yields on Greek bonds soared on Thursday following the news, with yields on three-year paper rising 134 basis points to 25.10 per cent, the highest since the country’s restructuring. Its 10-year yields climbed 45 basis points to 12.18 per cent.

More