Grexit looms again

It’s been 7 months and taken a private sector default but there is mounting evidence that European leaders are again reaching the limits of their own failure on Greece. So are we being soften up for a Greek exit yet again? Possibly, but even if that isn’t the case there is growing evidence that Greece is in need of a renewed structured default in order to remain inside the Euro.

In September the Troika is expected to deliver a new report on the state of Greek finances with the aim of issuing another € 31.5 billion tranche from the bailout agreed a year ago and most of this money is supposed to go towards supporting the Greek banking system. It is, however, becoming increasingly apparent the the country is failing to meet its obligations and speculation is mounting that the country is losing support from northern states.

According to the EuroGroup leader, Jean-Claude Juncker, there is no threat of a ‘Grexit’ unless the country violates its obligations under the current bailout agreements:

Greece will not leave the eurozone unless the country “totally refuses” to fulfil any of its reform targets, one of Europe’s most influential politicians said in advance of the latest Greek plea for leniency from its austerity programme.

Jean-Claude Juncker, right, who heads the Eurogroup collection of eurozone finance ministers and is also the Prime Minister of Luxembourg, expects Greece to step up its efforts to fulfil its reform targets.

“(An exit) will not happen, unless Greece were to violate all requirements and not to stick to any agreement,” Mr Juncker said in an interview with an Austrian newspaper.

But according to Spiegel the Troika has already found evidence that Greece has not met these terms even as it attempts to find another €11.5 billion in savings:

Athens has not been having an easy time coming up with the €11.5 billion in cost cutting measures over the next two years it has promised Europe. Indeed, Greek Prime Minister Antonis Samaras is reportedly set to request an additional two years to make those cuts during meetings later this week with German Chancellor Angela Merkel on Friday and French President François Hollande on Saturday.

But according to information obtained by SPIEGEL, the financing gap his country faces could be even greater. During its recent fact-finding trip to Athens, the so-called troika — made up of representatives from the European Central Bank, the European Commission and the International Monetary Fund — found that Greece will have to come up with as much as €14 billion to meet the terms for international aid.

The Greek finance ministry held meetings overnight in order to finalise the proposal for the spending cuts which have taken months to secure. Greek PM , Anonis Samaras, is due to meet with Juncker on Wednesday when he travels to Athens, followed by Angela Merkel in Berlin and Francois Hollande in Paris.
It is believed that Samaras is seeking further extension on the existing bailout, which in itself would require additional funding, but the Germans appear in no mood to negotiate. The German parliamentary leader of the CDU-CSU stated over the weekend that there was no more room to negotiate on the matter and that if Greece were to fall into bankruptcy then it would be expensive but manageable. This was followed up with similar statements from other sitting members within Merkel’s coalition and by ECB executive member Joerg Asmussen who said:

A Greek euro exit would be “manageable” but much more expensive than some people believe.

“It would be associated with a loss of growth and higher unemployment and it would be very expensive – in Greece, Europe as a whole and even in Germany”

Mr Asmussen went on to say that Greece leaving the Euro wasn’t his preference but this was up to Greece to meet its obligations. Also overnight the German Deputy Chancellor and FDP leader, Philipp Rosler, was reported to have said that he couldn’t imagine a third aid package for Greece.

But it isn’t just the Germans with doubts. Once again Finland is seen to be taking the hard line with statements from the European affairs minister, Alexander Stubb, that there will be no new aid package for Greece until there are measurable structural reforms in place.

Greece has now entered its 5th year of recession and the economy continues to worsen. The latest package from Greece promises even more cuts to pensions, the public service, hospitals, education and defence along with more sales of state assets, but it is quite obvious that the country needs more than just another round of promised cost cutting. Apart from the ever-growing competitiveness divide the major reason Greece can’t meet its obligations is that the failing economy continues to deliver lower than “expected” tax revenues.

Greek GDP contracted 6.2% in Q2 on a yearly basis, unemployment is over 23% and rising with nearly 55% of those between the ages of 15 and 24. Industrial production, although showing some brief signs of life, remains in the doldrums with predictions of a fall of 6.9% this year after a fall of 7.1% in 2011. On top of that businesses and manufacturer forward indicators look woeful with steep reductions in new orders in the latest PMIs. Even after the PSI the government budget is still running at an 8% deficit and the country’s financial position continues to worsen as debt to GDP continues to climb. In short, Greece now resembles a failed state.

In the last month the country only managed to make payments on a €3.2bn bond redemption because the ECB adjusted the ELA program to allow addtional T-bills as collateral. The Greek government issued new T-bills just 2 weeks ago which were purchased by Greek banks, the money was used to make the payments to official creditors while the banks received new loans under the ELA with the same T-bills as collateral. This sort of monetary fiddling maybe enough to keep the country on life-support for a short period of time, but its quite obvious that it has nothing to do with getting the country back towards a sustainable position as it continues to add to the debt of the country.

No matter what your ideology on the situation it is now clear that Greece is unable and/or unwilling to meet the demands of northern Europe and that giving the country even more debt in hope of return is pure delusion. Mr Draghi recently made comments that the Euro was ‘irreversible’, but if that is the case then the rest of Europe has no choice but to continue to roll-over funding through Greece or accept a new round of defaults. German and Finland at least appear to be once again weighing up which one of those options would be less painful.

In the meantime Europe continues to front-load the risk into September:

Germany’s Deputy Finance Minister Steffen Kampeter has made it clear that no final decisions will be taken regarding Greece’s bailout when Prime Minister Antonis Samaras meets German Chancellor Angela Merkel on Friday.

Kampeter said that nothing would be agreed on a bilateral level and Germany would wait until the troika delivers its assessment on Greece’s progress next month.

“It is certainly true that the Greek government – and that is to be expected – will present its positions,” Kampeter told Deutschlandfunk radio on Monday. “But… the basis for decision making is not the desire of the Greek government, but the troika report, which is not due until September.”


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  1. This quote will forever haunt him “For Jean-Claude Juncker, the prime minister of Luxembourg, the threat of immediate market turbulence means the usual norms of transparency don’t apply.
    “When it becomes serious, you have to lie,”

  2. The germans have embarked on the final solution, they are pursuing Helmut Kohls original vision of an integrated Europe together with a monetary union.
    The germans will not support policies that will reduce the pressure on markets until greater integration occurs. Europe is going to be oscillating for a number of years

    • Just a heads up: the words ‘final solution’ may be misinterpreted by people in the context of Germany…

      You are probably not aware of the sensitivities but for me, raised in Europe, the first interpretation was not a positive one.

      I agree that Europe will be oscillating for a number of years, not sure whether it will actually lead to a Federation.

      • Sorry I didnt mean to offend, I should ve used a better choice of words..
        My point is that the Germans are pushing towards an integrated Europe and that reforms often need the carrot and stick approach and I believe Merkel etc know exactly what they are doing.

  3. “It is believed that Samaras is seeking further extension on the existing bailout, which in itself would require additional funding, but the Germans appear in no mood to negotiate.”

    It seems to me that Greece will get an extension.

    From AAP:
    “With the spending cuts plan in hand, Samaras will be able to argue that Greece should get the two-year reprieve as the bailout agreement allows an extension to the program in case of a deeper than expected recession. Athens now predicts that its economy will contract seven per cent in 2012, significantly higher than the 4.5 per cent forecast when the bailout deal was signed in March.”

  4. here we go again, bears getting pretty desperate lately having missed another great rally….time to make up another grexit story…..yawn

      • the bears missed the rally DE, there is no doubt about it. unless they are saying one thing here and doing the exact opposite on their own account. The bears went into overdrive in may and june. It was the grexit to end all grexits…..their long awaited eurogeddon was finaly here…and what happened? the Greeks voted to keep the euro and remain in the EU. So why are bears dredging up old, recycled and very boring gexit stories again?

        • The overall nature of the situation means that recovery is unlikely to be on the cards. If you’re betting the house on never-ending rallies, your luck will run out some day.

          Not that I have any experience in trading whatsoever, but living in a resource region I see a lot of people who have bet everything on their ability to simply walk in and out of abundant $150 000 a year jobs whenever they feel like and have leveraged themselves to the hilt accordingly.

          Not saying that you have left yourself as open as they have, simply that just because people are so afraid that they have voted time and again to put themselves through ongoing purgatory, doesn’t mean that they won’t suddenly change their minds.