BlogSpot - Much Grexit(ment) and high uncertainty
Current state of negotiations—Reports (see EuroIntelligence) suggests that there is little or no progress in talks with the Brussels Group, and that no agreement is expected at the Eurogroup meeting in Riga this week, with no progress on the labor market or pension reform front, no agreement on 2015 budget targets (Bloomberg). Alberto Gallo (RBS) reports that the negotiating parties are entrenched in their own positions: Greece standing on its red lines (Bloomberg): no cuts to pensions or public salaries, no new taxes or sales of state assets, and creditors pushing the Greek government to implement more reforms. On fiscal measures, Silvia Merler provides a sobering look at the better than expected Greek primary balance, largely explained by EU funded revenues (with underperformance of ordinary revenues) and non-payment of bills. Theodore Pelagidis (Brookings) blame the greek government’s incompetence and calls on creditors to offer extending the EFSF loans by an additional decade; funding for the humanitarian crisis; a new low-interest ESM loan; an agreement bringing investment money that will involve the European Investment Bank; a front-loaded program regarding European structural funds; plus the remaining tranches of Greece’s current program. Ashoka Mody (Bruegel) calls on the IMF to recognize its responsibility for the country's predicament and forgive much of the debt, while Peter Doyle, in FT Alphaville, criticizes the IMF for insisting on primary fiscal surpluses of 4 1/2 percent of GDP despite Greece’s depressionary circumstances. Tyler Durden (ZeroHedge) reports that the US government is increasingly worried about Grexit, which they see as a large tail risk.
Cash constraints—Gallo provides a summary of upcoming payments (end-April: €1.7bn pension/salary payments; 1 May: €202mn IMF; 8 May: €1.4bn T-Bill; 12 May: €770mn IMF; 15 May: €1.4bn T-Bill).
Reuters writes that the state's cash balance will be negative from April 20 if the government does not extract the €2bn in cash deposits remaining in various public bodies. Erik Nielsen (UniCredit) sees a temporary period during which the government will start accumulating arrears: already against domestic suppliers, then maybe against pensioners and public employees—with the start of using of domestic IOUs to be used for some tax payments. Arrears to foreign creditors seem increasingly likely, probably protecting the IMF as long as possible. MacroPolis looks at how the government can finance its May obligations—through more transfers of funds, possibly the compulsory transfer of pension funds cash reserves.
According to recent reports (see Citi for example), Greece passed a presidential decree to oblige state bodies, ranging from hospitals to local authorities and municipalities, to transfer cash reserves to the central bank, which would raise estimates from €1.2bn to €3.5bn, a move that was poorly received by the Greek public according to Tyler Durden (Zero Hedge) and similar to imposing capital controls (Tyler Durden). Reuters noted that the money is then lent to the debt agency for one to 15 days against collateral and is paid back with interest (around 2.5%). eKathimerini also indicated that the government is hoping that the Eurogroup summit due on May 11 will lead to the release of €1.9bn in SMP profits from Greek bonds held by the Eurosystem on the secondary market.
For Citi, this confirms the lack of cash resources yet provides a bit more time before the cash reserves are fully depleted. Zsolt Darvas (Bruegel) is more nuanced: he looks at Greek government assets (worth €86.6 billion last September), ranking Greece seventh among all EU countries. A missed IMF payment would initiate a 2-month grace period, according to the fund’s strategy document on overdue financial obligations. During the grace period, capital controls may be needed.
Financial contagion to the banks— Bloomberg reports that the ECB is studying curbs on Greek bank support as unease grows about the Greek government’s position in negotiations on the final tranche of the second bailout program: haircuts could be raised in the absence of Greek reform progress. Citi argues that the ECB would likely continue to support the Greek banking system even in the event of a missed IMF payment, at least for a period, provided that there is enough evidence that the Greek government remains intent on finding a solution in terms of securing additional funding through a subsequent financial assistance program.
On likelihood of Grexit—Vitor Constancio, in a recent speech (hat-tip Citi) said that “we are convinced at the European Central Bank that there will be no Greek exit. The Treaty does not foresee that a country can be formally, legally expelled from the euro.” Alberto Gallo (RBS) sees higher chances of a missed payment in May, with the implementation of capital controls and potentially a new vote, but views Grexit risk as very unlikely. Charles Grant and Christian Odendahl (Centre for European Reform) see Germany is sleepwalking into Grexit, and EuroIntelligence notes that the German policy establishment is favoring a parallel currency as a transitional regime towards exit together with capital controls.
On the impact of Grexit—Ewald Nowotny (hat-tip Citi) noted that a Greek exit from the euro area would not have the same potential impact on the currency union as it would have done two years ago. Citi reinforces in their Euro Economics Weekly that Grexit would probably have only modest and temporary negative effects on the overall euro area economic outlook, reflecting low economic and financial exposure to Greece and the likely scope for policy response from ECB and other EU bodies. Anders Borg (hat-tip EuroIntelligence) makes the point that the Grexit would simultaneous damage Greece and the eurozone—mostly on the (geo)political front. Nikolaus Blome (Der Spiegel) argues that, given lack of progress, additional costs to help Greece would be useless. Wolfgang Munchau (FT) writes that the main impact of Grexit will not be contagion but a change in the nature of the eurozone from monetary union to fixed-exchange rate system, and a massive reputational loss to the EU. The strong argument for a default-inside-the-eurozone solution is thus geopolitical.
A wide range of alternative solutions
Possible scenarios—For Citi, there are four main scenarios (including Grexit) for the Greek outlook in the coming months—all four being equally possible: (i) a new program agreed before/around end-June, without capital controls or an interruption of ELA; (ii) a new program but only after capital controls are imposed and/or a Greek government default; (iii) no new program, government default, capital controls, scrip issuance and yet no Grexit; (iv) Grexit. Vitor Constancio (hat-tip Citi) noted that capital controls “can only be introduced at the Greek government’s request”, noting that they should be “temporary and exceptional”, and added that the Cyprus example showed that controls did not imply EMU exit.
Debt restructuring— EuroIntelligence reviews the debate on an inside-the-eurozone-default. For Wolfgang Munchau the biggest obstacle is not legal or technical, but the Greek government's lack of preparation. Simon Nixon (WSJ) sees a default as the most likely option, which would imply capital controls and a parallel currency to pay pensions and salaries, with a devastating impact on the economy. For Mark Jones and John O’Donnell (reuters), one possibility would be that Greece defaults and then resort to paying public workers in IOUs—a scenario explored by the ECB, that may help in the short term but could create large distortions if IOU payments stays in place a long time. Wolfgang Munchau (FT) argues that a partial default is certain, but not synonymous with Grexit—one key element will be to keep banks liquid (see Die Zeit for a discussion on how the German government is preparing for this), which could be possible with funding from Russia or other sources, but with high political risks. Yannis Koutsomitis (Toxrima) details a scenario with a default, first on IMF payments and then on European obligations, resulting in extensive bankruptcy proceedings.
Alberto Gallo (RBS) gives another look at GDP-linked bonds and at Europe’s incapacity to restructure private and public debt overhangs (95% of non-performing credit in Europe remains on bank balance sheets, for a total of over 10% of GDP). A long-term solution would be flexible, growth-linked debt (FT Video), for Greece and other small EMU countries. Gallo sees as the most likely outcome a third bailout with a soft restructuring (maturity extension, interest rate reduction)—with little impact on Greece in the medium-term.
