According to various news sources over the weekend today is Greece’s D-Day. I doubt very much whether that is actually the case due to the seriousness of the situation, but there is no doubt that time is running out for all parties involved to make a decision about Greece’s immediate future:
Euro zone finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately-held debt until it guaranteed it would implement reforms needed to secure a second financing package from the euro zone and the IMF.
Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default. But the meeting was postponed because of Greek reluctance to commit to reforms.
Instead, the ministers held a conference call on Saturday to take stock of progress on the second financing package, which euro zone leaders set at 130 billion euros back in October.
“There was a very clear message that was conveyed from all participants of the teleconference … to the Greeks that enough is enough,” one euro zone official said. “There is a great sense of frustration that they are dragging their feet.
Dragging their feet, or being dragged by the feet? I guess it depends on your perspective as Greece is caught in a deadlock between a deal with private and official creditors. The trouble is that the private sector do not appear to want to accept a deal that satisfies the demands of the official sector, which means Greece is required to make even greater cuts to satisfy Europe in order to get its next bailout.
These cuts include a 25 per cent cut in private sector wages, 35 per cent in supplementary pensions and the closure of approximately 100 state-controlled organisations. This will immediately lead to a re-newed round of job losses on top of lower incomes which appears to be a step too far for Greece’s politicians but European official are refusing to agree to the private sector restructuring plan in order to force through their requests.
So far there is no deal which has lead to an acceleration of the frustrations surrounding Greece:
The Greek finance minister, Evangelos Venizelos, said on Saturday that talks between the government and its foreign creditors on a second rescue deal were “on a razor’s edge,” adding that though progress had been made on some levels, crucial issues were unresolved.
Agreement was reached on issues like recapitalizing Greek banks and the privatization of state assets, Mr. Venizelos said.
“Two major, interrelated issues remain unresolved — labor relations and wages in the private sector, and the fiscal measures that must be taken to ensure we are within the target for 2012,” Mr. Venizelos said after a two-hour conference call with euro zone officials. Despite the barriers, a deal must be reached in bailout talks by Sunday night, he said.
As MacroBusiness readers would be aware, the Private sector talks ( the PSI+ ) have been going on for months and while they have Greece’s financial position has continued to deteriorate with another 15 billion euro gap appearing in the last 2 weeks. For a number of reasons the current approach to Greece is failing and it is time for decisions to be made. Greece must either meet all demands of the Troika to receive the next payment, or it will default.
As I type this post the news out of Greece is completely confused. Half the media is reporting that after a 5 hour meeting with Greece’s 3 party leaders Lucas Papademos has been unable to get a consensus with the party leaders refusing to accept the new conditions of the bailout. The other half is reporting that Mr Papademos has released a statement saying there is agreement on an additional 1.5% GDP cut to spending along with other concessions. These statements seem at odds with other reports of Antonis Samaras, the leader of the centre-right New Democracy party, stating “They’re asking for more recession than the country can take”. All media outlets are reporting that talks will continue on Monday, so it is likely this isn’t over.
Once I get some clarity on the situation I will put up another post, but the Greek unions have just announced yet another strike against austerity which isn’t going to make the official sector particularly happy.
Moving on from the Greek debacle to some important things happening behind the scenes in Europe. Back in December last year the European Summit agreed on what had come to be known as the “six pack”. These were a set of 5 regulations and 1 directive ratified by the EU leaders with the aim to ‘ensure future fiscal discipline’ in the Eurozone. Part of this package was a well overdue framework for monitoring macro-level imbalances across the zone:
Reducing macro-economic imbalances
Over the past decade, the EU has registered serious gaps in competitiveness and major macroeconomic imbalances. A new surveillance and enforcement mechanism has been set up to identify and correct such issues much earlier: the Excessive Imbalances Procedure (EIP), based on Article 121.6 of the Treaty. It will rely on the following main elements:
- Preventive and corrective action: The new procedure allows the Commission and the Council to adopt preventive recommendations under article 121.2 of the Treaty at an early stage before the imbalances become large. In more serious cases, there is also a corrective arm where an excessive imbalance procedure can be opened for a Member State. In this case, the Member State concerned will have to submit a corrective action plan with a clear roadmap and deadlines for implementing corrective action. Surveillance will be stepped up by the Commission on the basis of regular progress reports submitted by the Member States concerned.
- Rigorous enforcement: A new enforcement regime is established for euro area countries. It consists of a two-step approach whereby an interest-bearing deposit can be imposed after one failure to comply with the recommended corrective action. After a second compliance failure, this interest-bearing deposit can be converted into a fine (up to 0.1% of GDP). Sanctions can also be imposed for failing twice to submit a sufficient corrective action plan. The decision-making process in the new regulations is streamlined by prescribing the use of reverse qualified majority voting to take all the relevant decisions leading up to sanctions. This semi-automatic decision-making procedure makes it very difficult for Member States to form a blocking majority.
- An early warning system: an alert system is established based on an economic reading of a scoreboard consisting of a set of ten indicators covering the major sources of macro-economic imbalances. The composition of the scoreboard indicators may evolve over time. The aim of the scoreboard is to trigger in-depth studies which will do deep dive analyses to determine whether the potential imbalances identified in the early-warning system are benign or problematic. The Commission can organise missions, with the ECB if appropriate, to conduct the in-depth reviews which shall be made public.
Planned scoreboard
- 3 year backward moving average of the current account balance as a percent of GDP, with the a threshold of +6% of GDP and – 4% of GDP;
- net international investment position as a percent of GDP, with a threshold of -35% of GDP;
- 5 years percentage change of export market shares measured in values, with a threshold of -6%;
- 3 years percentage change in nominal unit labour cost, with thresholds of +9% for euro-area countries and +12% for non-euro-area countries.
- 3 years percentage change of the real effective exchange rates based on HICP/CPI deflators, relative to 35 other industrial countries, with thresholds of -/+5% for euro-area countries and -/+11% for non-euro-area countries;
- private sector debt in % of GDP with a threshold of 160%;
- private sector credit flow in % of GDP with a threshold of 15%;
- year-on-year changes in house prices relative to a Eurostat consumption deflator, with a threshold of 6%;
- general government sector debt in % of GDP with a threshold of 60%;
- 3-year backward moving average of unemployment rate, with the threshold of 10%.
Although I consider the resolution framework to be faulty because the corrective actions are far too one-sided it is important that Europe has a framework in place to monitor and recognise these issues. What makes this monitoring so positive is that not only are government finances being monitored but the private and external sectors as well. This in itself is a big step-forward.
Since December the economic indicators scoreboard has been finalised and there have been a number of presentations provided to European leaders about the new framework. An example is the one at the bottom of this post provided by the President of the European Commission at last weeks EU summit.
The reason I mention this is because in 2 days time, on Feb 8th, the first report under the new framework is to be delivered by Olli Rehn:
This assessment is based on an economic reading of a scoreboard of selected economic indicators. This will be the first time the Commission presents this report since strengthened rules on economic governance, the so-called “six pack” entered into force on 13th December 2011
This report is likely to have a large bearing on the economic policies of Europe over the next few years, so I consider it to be quite important. I just hope that the responses to the problems are far more holistic than what we have seen so far.
Thank you to AnonNL for some of the information provided in this post.
Presentation, J.M. Barroso – European Council 30 Jan 2012
The bit that is confusing me is that back in June last year the bondholder haircut was 21%. Then in November it went to 50%, and there was quite a bit of debate about whether that was voluntary or not, with it seeming to be a close call either way. Now here we are in February and the haircut is over 70% (when you include the sub-par bonds they will be getting).
And this is still voluntary? The ISDA seem strangely quiet at the moment.
At the rate this is going I predict that by June the haircut will be 120% and the bondholders will be paying Greece to hold their bonds. Voluntarily of course. Actually I’ve always been firmly in the Messy Default Is Inevitable camp, so I think it’s increasingly clear Greece isn’t going to still be in the Euro by June.
“Angry Youths Attack House Of Greek President Papoulias; Hurl Rocks, Molotov Cocktails”
http://www.zerohedge.com/news/angry-youths-attack-house-greek-president-papoulias-hurl-rocks-molotov-cocktails
Greece is a nailbiter…
This just in, the Troika changed it stance on what Ireland can/should do with the revenue from privatizations. Previously IMF, EU and ECB wanted Greece to use the revenue to lower its debt. Now they opened up the possibility for Ireland to use a substantial amount to invest and stimulate the economy.
Definitely a shift in focus in the EU, as highlighted in your post.
There is a reasonably strong sentiment over here in Europe (I am in Moscow now but have been in Cyprus and Athens within the last week) that the important thing here is to drag these negotiations out for as long as possible.
I have been talking to more than a few economists and analysts and they are all saying the same thing – that there is no way Greece can avoid a default. The debt and the austerity required (if people believe that would sort out the debt) are simply too great.
Then after Greece there is Portugal (which another colleague of mine was off to guage last week – and he is getting similar feedback there, that default is almost inevitable. Probably not as much as Greece, but still near inevitable).
That brings us to the logical question of why not call the default early, and the European economists and financiers tend to be saying that the longer the charade of negotiations can be dragged out the longer French and German banks can prepare.
That said, a lot of people I have spoken with are saying that there is a long way to go for French Banks in particular. They are also saying that although almost everyone is expecting Greek default and is to sopme extent preparing or prepared for it, the possibility of futher problems from Spain, Italy, or even Belgium remain (although not in the same league [yet] as Greece or Portugal). There is also some sentiment that if the EU goes less than hard on Greece and Portugal then Ireland (which is being exceptionally tight on its own people) may well ask why it is swallowing the bitter pills.
But certainly with Greece there was surprisingly strong agreement that it was being kept in the game only for the sake of other games.
Thanks for the information gunnamatta. That opinion fits well with my own. In fact I was asked this afternoon by a friend what I thought was going to be the ultimate outcome for Greece, this is what I said.
although I consider the problems of Greece to have been made worse by the policy response of the rest of Europe over the last 2 years there is little doubt that its position is now completely unsustainable without the rest of Europe. Greece needs a debt write-off followed by many years of fiscal transfers to get it’s house in order. If it doesn’t convince the rest of Europe that it is worth the effort then it will default.
About a month or so ago there was a very obvious change in stance from Germany on Greece, and i commented on macrobusiness that it sounded as if Merkel had reached the end of her political tether on the subject. In other words it seemed that the rest of Europe had simply lost patience and was actively weighing up the idea of managing Greece into default and cutting its losses was the best way forward.
Ultimately this is no longer a question of if, but when. It comes down to a question of defaulting now or defaulting later, which is really a question of whether the rest of Europe believes it is in a position to handle the fallout yet.
The fallout will hit Cypress, Portugal and then contagion into Spain so possibly the answer is not yet. However there is nothing in Greece’s economy to suggest anything is going to change even with a successful PSI so it is possible that the back office number crunching in Brussels has reached a point where Greece is no longer the winner. Maybe the Greek pollies have got it wrong with their brinkmanship, maybe the recent rhetoric from Germany isn’t bluff at all, maybe it was a last effort to test the water before making a final decision on when exactly to let Greece go.
I tend to agree. Politicians are using the D-word far too easily and often. A year ago there seemed to be a lot more panic.
So did the money that the EU pumped into Greece go to waste? I don’t think so. It bought Europe time to prepare and especially the LTRO seems to have provided a significant boost to the health of the banks. Billions vs the total collapse of the European banking system with global fallout… I know what I would choose.
I think the EU is now willing to take on the fallout, the rhetoric doesn’t seem like bluff to me. If Greece doesn’t push through reforms they will not get another €130 billion. No politician plays hardball like this without willing to go the distance. Imagine going back to disgruntled German voters saying that you were just bluffing and Greece won the staring contest… Guaranteed exit from office.
And on yet another different note, Government in The Netherlands is working on new legislation which will implement a limit to how much Governments can borrow. Just another example of how this Fiscal Pact trickles through all layers of Government in all member states. (In fact, I actually see a risk in that it may overshoot its intend!)
One of the things you notice in Athens in particular is that what is seen as brinksmanship on the part of Greek politicians elsewhere is seen as caving into Brussels and German bankers there. I dont think the Greek politicians have that much room to move.
The politics in Germany is also pretty tight here, with Merkels coalition partners not wanting the slightest iota of additional support for Greece (or Portugal). That is why they are looking for the IMF (or even China) to come to the party for Greece.
The funding of the bailouts has (as everyone has seen) hammered the sovereign ratings of France and Austria, and is part of the factors behind hardening of the political side against further support for the Greeks in places like the Netherlands.
The billions splashed out since the first Greek bailout has basically been to shift the scenario (in Don Rumsfeld terms) from unknown unknowns to known unknowns. But there is still a lot of unknown out there.
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