Even though Greece has looked to be on the verge running out of cash since late March, the government has managed to extend its own sell-by date by deferring payments to government suppliers, finding and emptying every pocket of funds it could fund, and most recently, using a special drawing rights account to pay the IMF. This is tantamount to the sort of behavior that Yanis Varoufakis decried early in the negotiations, of the creditors’ extend and pretend behavior being tantamount to using one’s credit card to pay the mortgage.
But it increasingly looks like a default is nigh. Varoufakis, who in the past has been reassuring or at least non-commital about Greece’s financial condition, said the government had only about two weeks of funding left as of the IMF payment finesse last week. The IMF was less precise as to timing, but a leaked bureaucratically measured memo dated May 14 stated the obvious: that there is no way Greece can meet its obligations coming due between June and August unless they come to a deal with the creditors.
Even as Greece is becoming visibly more desperate, so far, its “partners” are not acting as if they are alarmed by the prospect of default, as in scrambling to find ways to finesse Syriza’s red line or extend the negotiation timetable. Ekathimerini stated on Sunday that Alex Tsipras sent a letter to IMF managing director Christine Lagarde on May 8 stating that Greece would not be able to make its May 12 IMF payment, and also sent the letter to the EU’s Jean-Claude Juncker and the Mario Draghi of the ECb. Tsipras also reportedly called US Treasury Secretary Jack Lew with the same information. Yet the threat of an imminent default did not lead to a breakthrough (as in a concession) from the creditors in the technical-leval talks over the weekend, to the Eurogroup relenting on its existing plan to make no decision (as in not authorize) regardling a release of funds at its May 11 meeting. or to the ECB letting up on its government funding choke chain. As the Telegraph pointed out:
The Greek premier also appealed to the ECB to allow his cash-starved government to issue short-term government debt and requested the return of €1.9bn in profits held by the ECB from holding Greek bonds.
Following Syriza’s election, the ECB has banned Greek banks from increasing their holdings of T-bills, placing a further squeeze on the government which is scrambling to find the cash to make its public sector obligations every two weeks.
Mr Draghi and his governing council failed to lift the prohibition at a meeting last week, but did provide an additional €1.1bn in emergency liqudity to the country’s banks.
In other words, the ECB is continuing on its inertia course, extending the minimum amount of support needed through the ELA, which makes the severity of the bank run visible on a close to real-time basis. And while ECB directors have also made a point of not sounding terribly anxious about a Grexit or Greek default. While they’ve made it clear that they would prefer not to see it take place, they have also said they believe they can handle it.
Note that well-placed observers, including those who are in contact with the Greek government, believe that the ECB will not withhold ELA support or take other overt action against Greece without having political cover. But it is an open question as to what constitutes political cover. A new Bloomberg article suggests Greece is near the end of its runway on the banking front. ELA support requires pledging collateral and the Greek banks are getting close to running out:
Greek banks are running short on the collateral they need to stay alive, a crisis that could help force Prime Minister Alexis Tsipras’s hand after weeks of brinkmanship with creditors….
European policy makers are losing patience with Tsipras who said as recently as May 14 that he won’t compromise on any of his key demands. While talks are centering on whether to give Greece more money, the European Central Bank could raise the stakes if it increases the discount on the collateral Greek banks pledge in exchange for cash under its Emergency Liquidity Assistance program….
The arithmetic goes as follows: Greek lenders have so far needed about 80 billion euros ($92 billion) under the ELA program.
Banks have enough collateral to stretch that lifeline to about 95 billion euros under the terms currently allowed by the ECB, a person familiar with the matter said. With the central bank raising the ELA by about 2 billion euros every week, that could take banks to the end of June.
A crunch will come if the ECB increases the haircut on Greek collateral to levels not seen since last year. That could be prompted by anything from a complete breakdown in talks to a missed debt payment, the official said. A continuation of the current impasse could even be all that’s needed, the official said.
An increased haircut would reduce the ELA limit to about 88 billion euros, the person said. While that gives banks about four weeks before hitting the buffers, the leeway is so limited that Greece might need to impose capital controls, limiting transactions such as ATM withdrawals, to conserve the cushion.
Observe that the estimate of when Greece’s collateral position becomes acute comes from a single source, and the estimate of a run rate of €2 billion per week is on the high side. Nevertheless, the validity of the concern is confirmed in the Bloomberg sources who describe the Greek government trying to come up with other sources of collateral, such as government guarantees, but there is no certainty that the ECB will accept them, particularly in light of the ECB’s threat that it will tighten collateral requirements.
There are no signs that the IMF is prepared to relent either. The leaked May 14 memo, via Channel 4’s Paul Mason (attached at the end of the post) confirms an earlier leak by the Financial Times’ Peter Spiegel. The story stated that IMF was threatening to withhold is half of the €7.2 billion in bailout funds unless the Eurozone creditors agree to haircut their debts to Greece. New IMF forecasts showed that Greece was going to run a large primary deficit in 2015, 1.5%. As a result, Greece would either need to take severe austerity measures (on the perverse assumption that austerity works) or the Eurozone lenders would need to reduce the debt burden, as they had agreed to do in 2012 but never implemented.
The May 14 memo at the end of the post is written in bureaucratese but nevertheless makes a number of key points. The conclusions are grim, as far as the likelihood of a deal getting done:
There are still significant, process obstacles to negotiations. That’s deadly in supposedly advanced, urgent talks. The IMF still says it does not have access to all the data it needs, that its counterparties have little negotiating latitude, and that the IMF team has no access to government ministers. As the memo notes, “…staff clarified that they will not bring to the attention of the IMF Board any program review that has not been directly discussed with Ministers.” Translation: the Greek failure to participate fully in the talks in and of itself is preventing a deal from being consummated.
The two sides remain at loggerheads on key issues. IMF staff states “no progress has been made” on the fiscal deficit targets, and that Greece has gone backwards or plans to on structural reforms commitments, such as pension, labor, and public administration “reform”. Greek official say they are willing to make other types of reforms in these areas but have yet to say what they are.
The IMF staff reiterated its demand for debt relief. With Greece’s fiscal situation deteriorating, the math of implementing structural reforms and not giving debt relief does not work. However, between the lines, the IMF is again pressing for debt relief rather than giving up on the austerity leeching.
The IMF is not going to relax its procedures to make a deal. “On the fund side, it was made clear that no disbursement will be made until agreement on a comprehensive review is reached….The Managing Director underscored that the Fund cannot complete a ‘quick and dirty’ review, and that staff hs to play by the rules and not obscure the Fund’s mandate.
The memo points out that the other European creditors have discussed a possible partial distribution of funds if some issues can be agreed but no “common position” has been reached.
In addition, as has occurred before, the Greek side seems to think more headway has been made than the creditors do. In a speech by Tsipras after the date of the IMF memo, he reported that “common ground has been found on issues such as fiscal targets” when the IMF put the status as “no progress”.
Peter Spiegel reported in the Financial Times last night based on further reports on the discussion at the May 14 IMF meeting that the agency is weighing a much harder line stance:
According to two officials briefed on the talks, at least one board member raised the possibility of presenting a “take it or leave it proposal” to Greece.
However, IMF staff said they still did not have enough data from Greek authorities to put together such a plan.
A similar tactic was used in March 2013, when the Cypriot government was presented with a severe bailout plan and told it must agree or lose ECB support for its failing banking sector.
The idea of a “Cyprus-like” presentation to Greek authorities has gained traction among some eurozone finance ministers, according to one official involved in the talks.
The official noted that the recent public backing by Wolfgang Schäuble, Germany’s finance minister, for a Greek referendum fits into such a scheme. Under this scenario, Mr Tsipras would take the bailout ultimatum to a nationwide vote for approval.
However, another official involved in the talks cautioned that a “take it or leave it” approach remained only one of many ideas being discussed informally as a way to finalise an agreement.
Bear in mind that if Greece defaults on the IMF in June, which appears likely, that this is not like a private sector default, where downgrades and collateral action kick in immediately. Thus, assuming a default occurs, debate among the creditors is likely to coalesce around a limited set of options, and a Cyprus-style cramdown will be on the list.
While a partial bailout would presumably also be under consideration, the IMF insistence on a full review and debt relief makes that option harder to achieve. The IMF move looks like blame avoidance and bureaucratic jockeying for leverage. As Peter Spiegel pointed out in an earlier article, the IMF previously threatened to withhold funding and then relented. However, the IMF obstinancy, at least short-term, makes it harder for the rest of the creditors to agree to disburse a small payment to Greece to buy more negotiating time. The February Eurogroup memo called for the IMF and ECB to approve a full set of reforms, so even agreeing how to proceed without that in place will require discussion and agreement among the Eurozone lenders (and presumably, but not necessarily, the ECB). Moreover, the Eurozone lenders presumably also wanted the IMF seal of approval to justify providing more funds to Greece, since in many countries, further support is controversial. Not only is the IMF not giving much desired air cover, it has effectively said that provide more new money in and of itself is a waste. The “new money” needs to come in the form of debt reduction.
In other words, despite the flurry of revelations over the weekend, the two sides look as deeply entrenched in their positions as before. While some progress arguably has been made, it’s at best incremental when a yawning chasm between the Greece and its “partners” remains on process as well as deal content. While both Greece are a significant cohort on the lender side are leery of a Grexit, the creditors seem to be getting increasingly comfortable with the notion of a default within the Eurozone, particularly since Mr. Market seems only intermittently concerned.
While Angela Merkel may decide to play deus ex machina and break this impasse, the two sides remain hopelessly at odds. The inertial path is to a Greek default.