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Where is Odysseus? Part 2 - Uncertainty
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What can Greece expect at the next Eurogroup?
The back-and-forth between Greece and its lenders is likely to continue right up to the start of the Eurogroup meeting on June 15, as all sides try to come to the type of accommodation that eluded them on May 22.
At last month’s meeting of eurozone finance ministers, the reluctance of the International Monetary Fund and Germany, in particular, to meet each other halfway meant that the proposal on the table fell short of what Athens had been expecting. Unsurprisingly, Finance Minister Euclid Tsakalotos felt that he could not accept a compromise which secured the next bailout tranche and little else for Greece.
The discussions that have taken place since, along with the public comments from representatives of the interested parties, have shed some light on what we can expect on June 15 – by which time the Greek government is expected to have completed its 140 prior actions, given that there were just 15-20 outstanding last week.
Firstly, there are certain elements of the potential agreement that seem to have been firmed up. This includes the Greek government signing up to primary surplus targets of 3.5 percent of GDP until 2022 and an average of around 2 percent of GDP between 2023 and 2060.
Furthermore, the conclusion of the second review will lead to the disbursement of at least 7.4 billion euros in new loans, with something extra on top for the clearance of domestic arrears by the Greek coalition. It is highly unlikely that this will all be transferred in one go. At least two sub-tranches are likely to be needed.
An agreement in Luxembourg will also clear the way for the European institutions to carry out their own debt sustainability analysis, independently of what the IMF decides.
From this point on, things become a little less certain. On May 22, it appears that Finance Minister Wolfgang Schaeuble made what he thought was a concession which went further than the debt relief package outlined in the May 2016 Eurogroup statement. He agreed to extend the weighted average maturities of EFSF loans to Greece by 0 to 15 years and to defer principal and interest payments for the same period, if needed. Schaeuble felt that this should have been specific enough, but also left sufficient doubt about whether the measures would ever be allowed, so no action would be required by the German Parliament at this stage. An open debate within Germany on debt relief for Greece is clearly not something that the governing CDU party welcomes ahead of September’s national elections.
However, Schaeuble’s offer did not satisfy the IMF, which appears to be demanding vastly enhanced restructuring measures that the eurozone, not just Germany, would have trouble signing up to given that there are significant differences between the Europeans and the Fund over Greece’s growth projections for the coming decades and how much relief will actually be needed. Also, the Europeans do not want the bilateral (GLF) loans from the first bailout and the more recent disbursals from the European Stability Mechanism to be touched for political and practical reasons.
In fact, the IMF’s position appears so detached from what could be considered feasible for the eurozone that it gives the impression that the Fund would not be concerned at all about the prospect of disengaging from the Greek programme, which has been such a source of external and internal criticism at the Washington-based organisation.
The absence of IMF managing director Christine Lagarde from the May 22 meeting, which was meant to result in a “global” deal, spoke volumes about how angst-ridden the Fund is over these discussions. It also suggests that Greece and its eurozone creditors may have to start planning for life without the IMF since it seems unlikely that the conditions for it to return to the programme can be met.
The June 15 meeting may result in some tweaks to the debt relief proposals made on May 22 but will not stray from the package outlined a year earlier and will leave the details of the restructuring to be sorted out in the months leading up to Greece’s expected exit from the programme next summer.
The IMF may greenlight the policy part of the programme, following the adoption of tax and pension reforms by Athens last month, but it will continue to deem Greece’s debt unsustainable. This will be enough for Athens to secure further funding but will create problems for the European Central Bank, which has to decide whether to include Greek bonds in its QE programme.
As things stand, it appears unlikely that ECB president Mario Draghi will be able to include Greece in his bond-buying scheme. Speaking to MEPs in Brussels last week, he said a “full agreement” is needed on June 15 along with “measures that will make the debt sustainable through time.”
Draghi warned that “QE for Greece is not to be taken for granted” and that the ECB’s Governing Council would have to make its “own independent assessment” of Greek debt sustainability, including adverse scenarios, before making a decision. This does not sound particularly encouraging for Athens and it is no coincidence that Prime Minister Alexis Tsipras has tried over the last days to lower expectations about what can be achieved in Luxembourg.
Tsipras had posited QE as a vital stepping stone in his efforts to build a path back to the international bond markets, which is the only way that Greece can guarantee its successful exit from the programme next year. However, the government has now started to suggest it could still go ahead with plans to make a test bond issue in the coming months even if QE is not forthcoming.
This would, however, need a robust agreement on June 15 and perhaps a clear indication in the Eurogroup statement of the support for Greece’s efforts to start borrowing from the private sector again. Even this, though, would still leave a big question mark over how the markets would react if Tsipras issues the first Greek bond for more than three years.
The factors that remain unknown and unpredictable heading towards the Eurogroup are whether all the eurozone member states are willing to back a deal similar to the one proposed on May 22 or whether some of them will feel that they went too far last month and begin to step back from such an offer.
This will cause serious problems for Tsipras and Tsakalotos, who have to find a way to present the agreement as something more than a disappointing defeat, which was how the May 22 proposal was viewed by the local media and opposition parties. Tsipras cannot allow his narrative of a gradual recovery and return to normality for Greece to crumble completely in Luxembourg. He has an ability to adroitly perform about-turns in strategy but this might be a pirouette too far even for someone with his political limberness.
There will be an, albeit limited, risk that the Greek prime minister could decide to adopt a more confrontational approach (similar to the early part of 2015) if he does not deem the June 15 offer satisfactory. He has already spoken of the possibility of taking the issue to the European Council on June 22 even though this approach has never worked in the past. This would generate a great deal of extra tension and leave all sides in a race against time to secure an agreement so that Greece can receive the funding it needs to meet around 6.5 billion euros of debt repayments in July.
The way things have worked out over the last few months means that there is no prospect of reaching an agreement on June 15 that will keep everyone happy. Muddling through and averting something much worse are likely to be the best prospects on offer.
*You can follow Nick on Twitter: @NickMalkoutzis
You mean to expect anything but an intransigent Berlin? Nothing, Schauble is determined to accelerate the fragmentation of Europe and that's a fact.