24 June 2015

Can a deal be agreed?

With the latest proposals looking the closest Athens has come to creditors demands; it provides, in theory at least, the basis for a deal to be inked. The Institutions now have hours left to do some serious number crunching to see if the headline figures add up, before the Eurozone Finance Ministers meet in Brussels tonight, with the hope of presenting a final proposal to the Eurozone heads of state on Thursday. Already, there are indications that Greece will have to move further as the creditors – particularly the IMF –  believe that the proposals rely excessively on tax hikes as opposed to spending cuts, something which could push the Greek economy further into recession.

Even if the figures are found to be in line and Greece and its creditors sign off – the deal will still have to be ratified in a number of Eurozone parliaments, including the Greek one. With the clock ticking down fast (Athens has to make its next payment of €1.6bn to the IMF on June 30th), it’s unclear whether the current programme will have to be extended (for the third time in seven months), or if all parties will agree to end the bailout before the final €7.2bn cash injection is released.

Can the deal get parliamentary approval?

If Greece and the creditors agree something by tomorrow (still not a given), the immediate challenge for Tsipras will be at home, where he’ll have to get the Greek parliament to back it. Despite Syriza’s election promises, what’s on the table now means that Tsipras has more or less capitulated completely to the demands of the creditors. It’s not likely to go down well.

With a majority of only 11 MPs, Tsipras will seek approval from the 200 MPs that form the Central Committee of Syriza. According to Greek press reports, 10-40 Syriza MPs are likely to revolt. Syriza’s junior coalition partner, the Independent Greeks, have also indicated that they could withdraw from the government. Tsipras could be left having to rely on the support of the opposition New Democracy. This in turn would open up the question of a referendum or new elections. Vassilis Primikiris, a senior member of Syriza’s hard-line Left Platform told Italy’s La Repubblica today:

I doubt [Tsipras] can afford to pass the deal [in the Greek parliament] without our votes and with the opposition’s votes. That would mean there’s no longer a majority and that we should go to elections.

Vassilis Primikiris, La Repubblica, 24 June 2015

As Greece’s largest creditor nation, the vote in the German Bundestag will also be key. With the Bundestag breaking for summer recess next Friday July 3rd, the vote will either have to be taken on the 29th or 30th of June – not allowing German MPs much time to consider the measures. A Bild report today suggests that a number of MPs from Angela Merkel’s CDU/CSU party are opposed a rushed vote on any new agreement with Greece. CDU MP Olav Gutting is quoted as saying, “I don’t consider it possible to approve anything on Monday or Tuesday.”

There is a possibility, then, that an emergency sitting of the Bundestag may have to be called. And while any deal backed by Chancellor Angela Merkel is likely to get through the Bundestag – it’s worth noting that with frustration towards Athens climaxing during the past five months, the breakdown in trust will surely come back to haunt Athens sooner or later – most likely when the discussion returns to an (inevitable) third bailout for Greece.

Will Greece get the money in time?

On the assumption that a) a deal is struck and b) it gets the necessary parliamentary approval, there is still the question of whether or not Greece will get the cash in time to make its IMF payment. Creditors will find it hard to release any funds before the 30th of June – not least because it will want to see some implementation of the reforms they’re demanding.

So how will Greece pay the IMF? There are ways it could get around this: Athens could raise cash quickly if the ECB allows it raise the cap on the short-term debt it can issue by about €2bn, allowing Greek banks to buy more of said short term debt. Allowing Greek banks to switch from ELA to normal liquidity would also help. It’s also possible that the Greek government has sufficient reserves set aside to make the payment; alternatively, it could stump up the payment with cash earmarked for other payments due down the line – operating on the assumption that it will get the final tranche of bailout money shortly afterwards.

The ECB could also agree to release some of the €1.9bn in profits from the ECB sale of Greek bonds that are due to be refunded to Athens in July. That would likely be contingent on Tsipras getting parliamentary approval, a process that could take anywhere between a day to a week – so, in theory, still before the 30th July deadline. Reports that Greece could tap into the €10.9bn set aside by the EFSF fund to recapitalise Greek banks are not credible, however. This funding could only be re-appropriated subject to further negotiations.

And if Greece misses the IMF payment?

In the short-term, this wouldn’t be so bad, at least in economic terms. Greece would technically not be defaulting – instead, it would take a major reputational hit, joining countries such as Sudan, Zimbabwe and Somalia, with “overdue obligations” to the IMF.

As we noted on our blog in April:

The short term impact of not paying the IMF may not immediately be dire in economic and financial terms, though of course it would involve serious reputational damage and further widen the already mammoth gap between Greece and its creditors. It may take a month before cross default clauses could be triggered and even then it rests with decisions of highly political institutions such as the EFSF. Such decisions would likely be managed to achieve the least controversial ends, but equally could quickly spiral out of control.

Raoul Ruparel, What if Greece doesn’t pay the IMF in time? 1 April 2015

No long-term solution for Greece without tackling debt issue

As Open Europe has long argued, Greek debt is unsustainable, and it will need some form of debt relief sooner or later. This is what Athens has been insisting upon. As Greek Labour Minister Panos Skourletis told German daily Süddeutsche Zeitung today:

The debt issue is very important to us. There has to be a sustainable solution to our debt-problem…If we don’t manage [to agree] something here, there may be no final deal.

Panos Skourletis, Süddeutsche Zeitung, 24 June 2015

The problem (and as my colleague Raoul Ruparel lays out in depth here), is that debt relief for Greece, raises all manner of deep-rooted existential problems to which the Eurozone does not have – and cannot yet provide – an answer. It’s almost certain that the Greek debt discussion will be delayed, and it is unlikely to be reopened until after the Spanish elections at the end of the year, given the meteoric rise of another anti-austerity party, Podemos, who is calling for debt restructuring in Spain.

Ultimately, the bitter note of the talks, the complete breakdown in communication on both sides, and the failure to address the fundamental problem of Greek debt, can only serve as a prelude to what’s to come even if an 11th hour deal is secured approved, and the IMF is paid back. It will only be a matter of time until we are back at where we started.