22 June 2015

Off to a bad start

A crucial day for Greece started off badly with reports emerging that Greece had sent in the wrong set of proposals. This was played down by European officials and Eurogroup Chief Jeroen Dijsselbloem but seemed to contribute to confusion amongst other finance ministers.

Ultimately the consensus was pessimistic – don’t expect a deal today and more work needs to be done by the institutions to assess the new proposals. In that vein the Eurogroup broke up very quickly after meeting for less than an hour. The consensus on exiting was similar, with many simply expressing the view that the Eurogroup meeting was largely procedural as it was needed ahead of the meeting of Eurozone leaders later in the evening. Internally, the meeting was said to be quite heated with German Finance Minister Woflgang Schauble and Irish Finance Minister Michael Noonan calling for the ECB to limit the level of Emergency Liquidity Assistance (ELA) given to Greek banks.

That said, Dijsselbloem ended on a positive note describing the new proposals as “broad and comprehensive”.

New proposals finally come round to the creditors view

As we have long predicted, Greece seems to have eventually come round to the creditors view on a number of points. The new proposals (which can be seen in the tweet below) appear to come closer to creditors’ demands, at least in terms of headline numbers:

  • As Greek Prime Minister Alexis Tsipras’ letter to creditors highlights, the proposals look to amount to savings of 1.51% and 2.87% of GDP in 2015 and 2016 respectively. This should allow Greece to meet creditors’ demands of a 1% and 2% primary surplus this year and next.
  • Crucially, the Greek government appears to have moved a lot on pensions. Athens now envisages savings worth 0.37% and 1.05% of GDP in 2015 and 2016 respectively – which is in line with creditors’ demands.  That being said, it hasn’t given into demands to phase out the “solidarity grant” which was a key point in the creditors demands and expected to save a significant amount.
  • The increase on health contributions for pensioners to 5% is also close to the 6% requested by the institutions. On the other hand, the extra revenue from VAT reform is projected to be worth 0.74% of GDP in 2016 – but the institutions are demanding 1% of GDP per year.
  • According to tweets by Sky Economics Editor Ed Conway, the proposals also see Greece pledge to continue with privatisations, including the controversial sale of the Helliniko Athens airport. This has been in the works for some time despite much political bluster on it back in Greece.

There remain a couple of questions. Firstly how credible are the figures attached to the measures. We have seen in previous proposals that the creditors have not believed the figures projected by the Greek government despite the totals seeming to match up. For example, the figures on amounts raised from restricting early retirement are up by €60m this year and €229m next year. This would require some serious adjustments to the policies. Secondly, the savings rely a lot on tax increases – including a significant corporate tax hike from 26% of 29% that is expected to raise €410 million in 2016. This is not in line with what many creditors would like to see – as expressed by Belgium Finance Minister Johan Van Overtveldt.

On top of this, crucially, the Greek government seems to have dropped its demand for debt restructuring – for now. It has finally accepted the need to see a short term deal first before the longer term negotiation.

What happens now?

As we wait for the press conferences after the meeting of Eurozone leaders its hard to say exactly (we will update this blog once they are done). It seems likely now that some kind of a deal could be reached this week. It may be a short term deal which would result in the end of the bailout or it could simply be an extension which would see the discussions delayed (as we described earlier today here).

Even though a deal looks closer, there are plenty of risks around and there is still no guarantee that capital controls will not be needed. Given the pace of deposits outflows – €6bn last week and around €1.6bn today – there remains a risk to the banking system. The ECB so far has continued to raise the ELA limit and will likely do so if a deal looks imminent but as the comments above suggest, there is increasingly political pressure around this.

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As we have noted before, this is probably just the beginning of the drama. Whether the agreement takes the form of an extension of a short term deal, the real tricky negotiations over debt relief and how Greece will fund itself over the coming years will remain. Furthermore, given the tough payment schedule Greece faces in the coming months, shown above, its not clear even the release of the €7.2bn final bailout tranche will be enough to see Greece very far. As such, for a number of reasons, we could find ourselves back in a similar position within a few months.

Update 22:38 22 June 2015:

The main press conference has finished. It was pretty brief but the tone was in line with our blog above. Greek proposals seen as a “positive step” and the basis for a deal. Another Eurogroup meeting will be held on Wednesday, ahead of Thursday’s EU summit. In the interim the institutions will more fully assess the Greek proposals. There seemed to be some confidence that the deal will be agreed by the end of this week, not least because there is no time left.

Commission President Jean Claude Juncker stressed that capital controls were not discussed and that now “is not the time” to talk about debt relief. It remains unclear if the deal will be an extension or a short term deal which actually ends the bailout, but AFP reported that the Greek side is now open to the former. It’s worth remembering that last time the Syriza government agreed to an extension they did not put it to the Greek parliament. That seems unlikely this time as it clearly involved new measures, but it is worth keeping in mind that it is an option.

German Chancellor Angela Merkel also held a press conference in which she also struck a relatively optimistic tone but warned that there is more work to be done. She also ruled out any debt relief or further “credits” under this bailout programme. Interestingly, (given point above) she stressed the Greek parliament must approve all reform and fiscal measures before funding can be released. It should not be underestimated that this will be a big challenge given the significant concessions in the plans. Merkel said that it was not discussed whether this would be an extension or end to the programme. She did say that a third bailout was not discussed because Greece said it didn’t want one.

All in all then, as we said above, cautious optimism for a deal as Greece finally bends to the creditors as was always expected.