As Greece continues to scramble to raise funds to avert default and keep paying pensioners and government officials, the end game is becoming clearer.
It was mystifying to have a reader of the German press maintain that Tsipras and Merkel had reached a deal in their Monday pow-wow. His conclusion was based on his reading of an authorized leak to FAZ, which described Merkel as having being in 2011 mode of not being willing to let the Eurozone fail, which he took to mean that Merkel had a deal for Greece in motion.
But like the oracular readings, official messaging can be ambiguous. Saving the Eurozone in 2015, when the ECB now has periphery bond yields firmly under control, is a vastly different matter than in 2011. Is the greater risk letting Greece default, or letting Greece get too many concessions, which would pave the way for France, Spain, Portugal, and Ireland to demand better, and in the eyes of Germans, more costly terms? Moreover, George Osborne and George Soros, whom one would imagine each have good inside sources, both warned that the risk of a Greek default had increased after the Tsipras/Merkel talk by virtue of nothing major having been resolved. Soros pegged the odds of a Grexit at 50/50 due to the fact that Greece’s primary surplus is on a trajectory to becoming zero.
Strange at it may seem, these two views may not be incompatible. Tsipras may have gotten a deal from Merkel. But if it is the one being bandied about in the press, all it is is a short-term stopgap. It does not signal any fundamental change in the creditors’ posture towards Greece, which is to keep the pressure high and push the new government to accept the terms on offer: work within the existing structural reform framework (Greece can propose changes in reforms or swapping out reforms for different ones), submit to review by and negotiation with the Troika, allow the Troika inspectors to have access to information. As we’ve said from the outset, the creditors were expecting to offer Greece economic concessions even before the talks (or more accurately, talking past each other) started, including lower primary surplus targets and a reduction in the financial cost of the debt, via extension of maturities and perhaps a further reduction in rates).
Greece is now raiding various agency cash stocks, including that of its public health service, to pay its bills. Yesterday, the rumor was that the government would be out of money by April 9; today the estimate is April 20. And Greece might stump up some cash prior to getting access to the so-called bailout funds, the €7.2 billion that it is set to receive when it gets its detailed reforms approved first by the Troika, then by the Eurogroup.
Even though various Eurocrats have suggested that Greece might be able to tap a portion of that €7.2 billion soon, it would have to go through the same multi-party approval process that it would take to get all the money, raising the issue of why release only a portion if all the steps to approve the reform list have to be fulfilled. But there may be another route for getting Greece a little breathing space. From the WSJ Brussels blog:
Athens has been trying to tap other sources of cash, successfully in the case of reserves in its bank bailout fund. Now it is looking at a €1.2bln refund from the European Financial Stability Facility – the eurozone’s bailout fund.
Greece’s bank bailout fund received €48.2 billion from the EFSF between 2012 and 2014 under the country’s bailout agreements so that it could replenish the capital of the Greek banks. While the money it received from the EFSF were in the form of bonds, Greece also used €1.2 billion in cash reserves from its own bailout fund to recapitalize its banks.
By February, when Greece’s new government signed an agreement extending the country’s bailout for four months, the fund had €10.9 billion left — which the government agreed to hand back to the EFSF, and keep earmarked for bank recapitalization.
But now Greece claims it should get back €1.2 billion out of the €10.9 billion it returned since that money didn’t originate with EFSF.
Here’s where things become complicated. In order to ask for the money officially, Greece will need a green light from the Single Supervisory Mechanism, the eurozone’s banking watchdog. This could prove tricky, as – under February’s agreement — Greece would only be able to use the money returned to the EFSF for bank recapitalization purposes.
What’s more, even if Greece can get around the request, it will need approval from both the EFSF board and from several parliaments across the bloc.
Eurozone officials caution that legally the whole process would be difficult, but say that a political decision could potentially bypass the legal snags.
Frankly, this sounds like a non-starter, particularly give the need for parliamentary votes, which takes time. Even a few days is a lot of time for a cash-strapped government. A Financial Times report concurred with our view:
Greek authorities have also been seeking €1.2bn in funding that they believe was wrongly taken out of the country’s bank recapitalisation fund by eurozone authorities. But EU officials said a quick decision on the matter was unlikely and even if Athens was awarded the cash it could only go towards bank rescues, not general government coffers.
However, the Reuters “a political decision” may be code for “If Merkel (and Hollande) want this done, it gets done.”
For now, the choke chain on Greece is still kept taut. Greece asked the ECB to raise the cap on how much in government T-bills that Greek banks could hold. Raising the limit would allow the banks to buy new bills from the government, letting Athens raise some fresh cash. The ECB said no.
Moreover, a new report from the Financial Times shows that European officials are as insistent as ever that Greece complete the steps delineated in the memo between Greece and the Eurogroup before Greece gets any of the €7.2 billion it desperately needs. And despite the obvious financial and time pressure, Greece does not appear to be taking the necessary steps. From the Financial Times:
Athens has promised to deliver a list of reforms to eurozone authorities by Monday. But officials cautioned that the list would still have to be agreed with bailout inspectors before eurozone authorities could make progress on any deal to free up new funding.
Though Mr Tsipras discussed his reform plans with Ms Merkel on Monday night, there were few signs that talks in Athens with bailout inspectors had become more active following the Berlin meeting.
“The big ‘if’ is that they seem to move at such a glacial pace,” said an official involved in the negotiations.
And the Eurocrats see the odds of that the Greek government hits the wall as real:
In the absence of progress, some EU officials were accelerating their preparations in case Athens runs out of cash before it agrees a reform programme. In Brussels, European Commission officials have begun looking again at EU law governing capital controls in case the growing uncertainty, or a non-payment to the IMF, spurs a renewed run on bank deposits.
The source of stress is not the payment of IMF loans; even though the government has yet another payment due in April, the agency tolerates slippage as long as the government intends to pay and can probably do so in the not horribly distant future. It’s maturing short-term debt that is the flash point:
A failure to pay either of the T-bills — one is due on April 14, the next on April 17 — would probably bring wider upheaval since they could trigger clauses in other debt obligations that would make them due immediately.
The ECB ceiling could make repayment of the April 14 bill particularly challenging. Greek banks have been the primary buyers of such debt and have essentially rolled over their existing holdings during recent T-bill auctions. But at least 20 per cent of the April 14 bill is held by investors outside Greece who are unlikely to roll over their holdings and Greek banks are now barred from buying up the difference.
The Financial Times also pointed out that pinching the health service’s cash was no mere budgetary finesse but would hurt the delivery of care:
In a sign that the cash crunch has become more desperate, officials at Greece’s state healthcare service, were asked on Tuesday to hand over a €50m reserve for paying arrears owed to medical workers.
Earlier this month about €150m of budget funding for hospital supplies was unexpectedly withheld, according to health ministry officials.
“The national healthcare service is already desperately short of resources after four years of cuts but both these moves are unprecedented,” one official said.
And remember, Greece’s hospitals are already in crisis. It’s hard to imagine how they function at all if things get worse.
Greece thus appears to have between three and four weeks to secure funding, and its best and probably only route is to submit to the process set forth in its February memo with the Eurogroup. The government still seems to be in denial that it must surrender or else default and run the risk that that entails a de facto Grexit. That comes about by virtue of the ECB taking the view that it cannot raise or must even cut off the bank lifeline, the ELA, and Greece being forced to nationalize and recapitalize its banks. The latter would necessitate reintroducing the drachma.
As we have said from the beginning, Greece was unlikely to prevail in the absence of outside help. The US was unwilling or unable to do much more than offer lip service early on. What passes for the left in Europe has also failed to apply remotely enough political pressure to have an impact. Greece is meeting its fate alone, and the outcome is not likely to be pretty.
Update 1:00 PM: As anticipated, Greece did not get its emergency money break. From Reuters:
Greece failed in a bid on Wednesday to secure a quick cash payment from the euro zone rescue fund to help stave off potential bankruptcy next month, raising pressure on Athens to deliver a convincing reform program within days.
Athens had appealed for the European Financial Stability Facility to return 1.2 billion euros ($1.32 billion) it said it had overpaid when it transferred bonds intended for bank recapitalization back to the Luxembourg-based fund this month.
But senior Euro zone officials agreed in a telephone conference on Wednesday that Greece was not legally entitled to the money, although they said they would consider how to deal with the issue in the future….
EU paymaster Germany, to which Tsipras made a fence-mending visit this week after weeks of acrimony between Athens and Berlin, was among the countries that opposed handing back the 1.2 billion euros…
The German stance made clear that despite the improved atmosphere in relations between Tsipras and Chancellor Angela Merkel, Berlin has not softened its position in substance.
And Greece was given an ultimatum on the call. From Bloomberg (hat tip Ed Harrison):
Greece has until Monday to show how it will follow through on reform commitments after the euro area ruled out speedy access to aid funds, three officials said following a conference call of finance ministry deputies.
The euro zone’s other 18 members were adamant on Wednesday’s call that Greece needs to deliver specific plans to see any more bailout cash, the officials said. Prime Minister Alexis Tsipras needs to show that Greece can rebuild trust in its promises, they said.