Eurozone: It's (never) too late?

Another last-minute stunt from Tsipras could not avoid the end of the bailout programme and Greece missing the reimbursement of an IMF loan. Never a dull moment. The events in the Greek crisis over the last 24 hours once again had interesting twists and turns but this time around the hard facts remained unchanged: Greece has missed its payment to the IMF, the bailout programme has expired and the referendum is on track. Greek Prime Minister Tsipras pulled another rabbit out of his hat yesterday, submitting a new proposal to the Eurozone creditors. The proposal was a request for a two-year programme funded by the ESM (without IMF involvement). This programme would cover all Greek financial needs and would also include debt restructuring. According to media reports, the proposal did not include any new reform measures. Tsipras’ proposal came hours after reports that the European Commission had suggested that a new compromise might still be possible. Whether Tsipras’ move was a kind of late self-persuasion or just standard brinkmanship remains unclear. In our view, it was a last attempt to gain the upper hand in the ongoing blame game between Greece and the Eurozone, showing Greece’s so-called willingness to compromise. In a telephone conference last evening, the Eurozone finance ministers quickly discussed the proposal but the conclusion was clear: nice try but far too late. Eurogroup chairman Dijsselbloem said that “the political stance of the Greek government doesn’t appear to have changed”. Requests from Tsipras for an extension of Greece’s bailout programme or debt relief were not possible. Nevertheless, the Eurogroup will have another conference call tomorrow. All of this means that Greece will not reimburse an IMF loan and the official bailout programme has expired. As regards the IMF loan, we stick to our view that this will not trigger a credit event. According to the IMF rules, missing a payment will now start an entire procedure with several steps which after a period of up to 24 months could lead to the expulsion of Greece from the IMF. In addition, after one month, the EFSF would have the legal possibility to reclaim all already paid loans to Greece. Something, which in our view would only happen if the political will to keep Greece within the Eurozone at that moment in time would have entirely disappeared. All in all, missing the reimbursement of the IMF pushes Greece into the same league as Zimbabwe, Sudan and Somalia, but it would not lead to further crisis escalation ahead of the referendum. The same holds for the expiration of the second bailout programme. Technically-speaking, nothing will change in the short run. However, the fact that the programme has officially expired means that, legally, it cannot be extended anymore. No matter what the outcome of the referendum and consequent steps of the Greek government will be. From a legal and technical perspective, any new compromise would now start from scratch and would have to be a third bailout programme. In sum, yesterday’s events marked another symbolic step in the Greek crisis but also confirmed that the issue between Greece and its Eurozone creditors goes beyond numbers and substance. It’s the clash between an ideologically-driven government and a consensus-driven and compromise-oriented Eurozone. Even if it is tempting, we will refrain from sharing our memories of famous songs referring to “too late” but one thing is sure: only a miracle could solve the current stand-off in the Greece crisis before this weekend’s referendum.

Eurozone: Referendum, chaos, Grexit?

On Friday night, the course of the negotiations on the end of the second Greek programme took another unexpected twist. A crucial week for Greece and the Eurozone lies ahead. No one knows how this week will end or what will happen after Sunday. However, it increasingly looks as if there are only two options left: new elections or Grexit. Tsipras’ move is now another climax in the increasingly disturbed relationship between the Greek government and the rest of the Eurozone. Capital controls, bank holidays and increased uncertainty will accompany Greece on its way to the 5 July referendum. Whether this road will eventually end with the Grexit is still too early to tell, even though the probability of a Grexit has clearly increased over the last days. In short, absent a last-minute miracle, Greece is looking into an unprecedented financial and political future in the coming days. Whether this future will eventually also include the Grexit is currently impossible to tell. The expiration of the official bailout programme and the reimbursement of the IMF, both due on Tuesday, will in our view not automatically lead to a default and further turbulences. All involved Eurozone players will probably want to keep the situation as contained as possible, at least until next Sunday. Comments from Eurozone finance minsters suggest that the door for new negotiations in the days ahead of the referendum is closed, though not fully locked. The most interesting question is what will be next. As we have seen so often in the Greek crisis, nothing is granted. It is very hard to exactly forecast what will happen. Even the Greek government returning to the negotiations between now and Tuesday night cannot be excluded entirely. In our view, without fresh money from creditors, Greece is likely to be in arrears on a €1.6bn payment due on Tuesday to the IMF. While credit agencies have not classified this as it lent to Greece on the back of the missed payment to the IMF. Of course, this is very unlikely to happen. In our view, Greece will not technically default in the days leading to the referendum, neither as a consequence of not paying the IMF nor as a consequence of the end of the bailout programme. Another issue, however, is whether the Greek government can actually pay public salaries and pensions at the end of the month. Cash withdrawals from Greek banks have accelerated in recent days. It was therefore almost a holiday. At the writing of this note, it is unclear whether Greek banks will only close for one day or for the entire week. Such capital controls and one or several bank holidays, might have been the price, the ECB had asked to continue with ELA. For the ECB, the tricky question is how to deal with this new situation. An ECB referendum is not part of the ECB’s rulebook. This means that the ECB will have to take technical decisions on ELA, which in fact have political implications. In our view, the ECB will continue with ELA until the referendum. It can argue that up to the referendum the solvency of Greek banks has not significantly changed from last week. At least in the ECB’s eyes. Moreover, in our view, the ECB will be very hesitant to increase political pressure on Greece just a couple of days before the entire Greek population can make use of a democratic right. The days leading to the Greek referendum should therefore be dominated by uncertainty and possibly financial market turbulences – at least in Greece. It does not look as if peripheral spreads will widen significantly, given that financial markets will probably regard the entire crisis as a Greek crisis and contagion should be limited. If we are wrong and financial markets go crazy, the Eurozone has sufficient instruments to fight contagion. In our view, the ECB’s OMT programme might only be a remote option. The more efficient tool to fight short-term volatility would be QE. It would also help the ECB to solve its front-loading problem. With volatility but no chaos in the rest of the Eurozone in the coming days is our base case scenario, the other question is what will happen on (or better: after) Sunday. It is impossible for us to forecast the outcome of the referendum, but we can at least sense the domestic political strategy behind the latest twist in the Greek drama. As the creditors’ proposals cross a number of “red lines” of the Greek government, Tsipras is risking a break-up of the government or his own party. A YES vote would give him the authority to clinch a deal with the creditors without losing face because of broken electoral promises. In this case we would probably see the five-month extension of the current programme, during which a total of €15.5bn of financial support would be provided. This would allow the Greek government to implement the structural reforms, which could then lead to a third programme and some limited form of debt restructuring. This still looks a feasible scenario as in a poll on Saturday, published in the To Vimanewspaper, 57.5% of Greeks said the government should close a deal with the creditors, while two-thirds want Greece to remain in the Eurozone. However, this scenario basically means that the Greek problems will continue to haunt the Eurozone economy for some time to come. With a Greek government that has not been very co-operative until now and doesn’t seem to have the will to implement market-oriented reforms, one can already anticipate a new stand-off when the extension of the programme would end in November. A defiant Greek government is actually recommending the Greek population to vote NO. If this were to be the outcome, then we would be back to square one: the Greek population wants to remain in the Eurozone without accepting the terms of the creditor nations. However, the fatigue amongst the creditor nations with the negotiating tactics of the Greek government has reached the point, that a Greek exit from the Eurozone is now considered as a viable alternative. According to The Guardian, Merkel told Tsipras that the vote was “a choice between the euro and the drachma”. A NO vote would not necessarily immediately lead to a Greek exit. We might actually see Greece also default on the ECB reimbursement on 20 July, without adverse consequences. However, this would necessitate the ECB to continue providing ELA to the Greek banks (already a stretch) and capital controls and limits on bank withdrawals will have to remain in place to avoid a collapse of the banking sector. However, a “no” vote and a default on the bond held by the ECB, even if not technically, is very likely to trigger an end to ELA. As a consequence, Greek banks would need to be recapitalsied (and/or nationalised) with money the Greek government does not have. IOUs or a dual currency would be the solution and, consequently, lead to a Grexit (see also our earlier note with an Q&A on the Grexit). In all cases, one thing seems quite sure: the recession in Greece would most probably deepen and more unrest is to be anticipated. The Greek mythology offers lots of interesting stories. Many of these stories seem to come back in the current Greek crisis, which took another unexpected and exciting twist over the weekend. Looking at the latest events, we see memories of Hydra and Hubris. Hydra was the serpent-like water monster with reptilian traits, which possessed many heads. For each head cut off, it grew two more. Hybris, or Hubris, on the other hand was the goddess of insolence, violence, reckless pride, arrogance and outrageous behaviour. Or simply put, an excess of ambition, pride, etc,ultimately causing the transgressor's ruin. Parallels with the current Greek crisis are obvious. Looking beyond the coming days and the next weekend, the Greek referendum does not only mark a new climax in the Greek crisis but also the end of muddling through in the Eurozone – even if the Greek people vote in favour of the proposal and indirectly of their membership in the Eurozone. Will there now be a series of referenda on the Eurozone membership? It is time to speed up institutional reforms and make the monetary union sustainable. The latest report of the five European presidents was supposed to kick-start the discussions. Discussions which should quickly shift to warp speed, if the Eurozone wants to consign Greek mythologies back to the realms of fantasy.

Final showdown - this time for real?

It seems as if the excessively used words of “final showdown” in the Greek crisis are finally here. And they are for real. Honestly, it becomes harder and harder to comment on the Greek crisis in a meaningful way. Yesterday was another example of confusion and diffusion. The day started with news reporting that Tsipras had told the Greek parliament that some creditors had rejected the Greek proposals. Later in the day, it became clear that the IMF had indeed issued a counterproposal, amending and integrating the Greek offer. No break-up of the negotiations, but normal exchange of proposals in an exhausting bargaining process. Later, the Eurogroup meeting ended with another unexpected twist. While earlier in the day, expectations were that the Eurogroup would negotiate for as long as needed to reach a deal with Greece, the Greek crisis took yet again another dramatic turn. The Eurogroup was suspended inconclusively after only one hour. Instead, a new meeting with Commission President Juncker, Greek Prime Minster Tsipras, Christine Lagarde from the IMF, ECB president Mario Draghi, Eurogroup president Dijsselbloem and ESM chairman Regling was held at midnight. Again inconclusive. All of this provides little evidence to become more optimistic about a positive outcome of the Greek negotiations. Today, the meeting marathon will continue with technical meetings of senior officials already this morning, at 6am, another meeting at the political level at 9am, another Eurogroup meeting scheduled for 1pm and then later at 4pm the European summit. Obviously and technically speaking, this meeting marathon could continue for many days (even weeks), European leaders will still be in Brussels tomorrow and a deal could even be signed off in the weekend. However, it is hard to see that all parties involved in the negotiations have the energy and will to continue much longer. Trying to separate facts from noise, the substantial differences between Greece and the Eurozone creditors mainly concentrate on three main areas: taxes, pensions and debt relief. While there seems to be a general agreement on the headline targets for the primary balance, there are still huge discrepancies on how to get there. It looks as if currently the main hurdle seems to be taxes. Instead of cutting public expenditures, the Greek government proposed to increase taxes and strengthen revenues. For a country not really known for a good track record in tax collections, this looks like a risky strategy. The creditors proposed to trim the Greek proposal of an increase in the corporate tax rate and reject the introduction of a one-off corporate tax on corporate profits. The more controversial area seems that of pension reforms. The institutions clearly want Greece to accelerate the transition towards a broad-based implementation of the limit of the statutory retirement age of 67 years, requesting that to happen by 2022, and not by 2026, as in the last Greek proposal. Also, the counterproposal asks to raise health contributions and to harmonize the contribution rules for all pension funds, seeking a closer link between contribution and benefit. Finally, the never-ending issue of debt relief is probably the biggest stumbling block. The Greeks want it, the others don’t want to give it (or eventually only at the end of a long reform ride). Looking at the substance of the differences between Greece and its creditors, a compromise still looks possible; at least in our view. The two crucial questions are how to deal with the issue of debt relief and how to eventually sell any compromise back at home. The latest comments from the Greek parliament suggest that selling at home might still be a challenge for Tsipras. Still, even if a compromise could be feasible, the series of latest events sends contrary signals and does little to soften atmospherical disturbances. In fact, it seems as if the entire Greek crisis has switched into warp speed. There are now as many contradictory statements, denials, inconclusive meetings and ad hoc special meetings on a single day as there were before within a week or a month. In our view a clear sign that the excessively used words of “final showdown” can again be used with a good heart.

De vijf presidenten en mijn vrouw

Mijn vrouw maakt me soms gek. Als goede Duitser hou ik van een lineaire aanpak. ‘One thing at a time’. Mijn vrouw ziet dat anders, houdt van meersporigheid en gaat onvermoeid door met nieuwe acties. Is alles net opgeruimd of hebben de kinderen net hun huiswerk af, wacht meteen een volgend project. Terwijl de Griekse crisis nog in volle hevigheid woedt, hebben de vijf ‘presidenten van Europa’ begin deze week een rapport over de toekomst van de monetaire unie gepresenteerd. De analyse is helder en goed. De vijf pistolero’s stellen dat de eurozone alleen overleeft als lidstaten soevereiniteit inleveren. Dat hebben we in het verleden wel anders gehoord. Het lijkt er evenwel op dat de auteurs tijdens het schrijven bang werden voor hun eigen ideeën. Concrete voorstellen zijn enigszins afgezwakt. Wat overblijft, is een reeks kortetermijnideeën voor alweer meer coördinatie en afspraken. Inderdaad, oude wijn in nieuwe zakken. Ideeën met iets meer vlees aan het bot, zoals een begroting voor de eurozone of een zelfstandige eurozoneminister van Financiën, zijn zeer vaag geformuleerd en moeten worden gelezen met een vergrootglas. Controversiëlere onderwerpen zoals euro-obligaties of een schuldcompensatiefonds hebben het rapport niet gehaald. Voor overtuigde Europeanen schiet het rapport van de vijf presidenten helaas tekort. De voorgestelde strategie van wat meer coördinatie brengt pijnlijke herinneringen naar boven aan het Euro Plus Pact van 2011, het begrotingspact en het Europese semester. Allemaal goede ideeën, maar uiteindelijk boterzacht. De eurozone heeft sindsdien niet aan concurrentiekracht gewonnen, de doelstellingen van het begrotingspact en de fameuze schuldenrem zijn niet gehaald en slechts de helft van de afspraken uit het Europese semester werd het afgelopen jaar verwezenlijkt. Meer lef en visie durfden de vijf presidenten waarschijnlijk niet aan, uit angst voor de eurosceptici. Je hoort die al roepen: ‘Hoe willen ze nu groots denken, als niet eens het kleine probleem Griekenland kan worden opgelost.’ Daarbij is het juist nu het beste moment voor een echte toekomstvisie. Recente cijfers van Eurostat tonen dat de bevolking niet zo eurosceptisch is als politici denken. Eurosceptici leven vooral in niet-eurolanden. In de eurozone is er een groeiend bewustzijn voor een Europese identiteit en is er zelfs een kleine meerderheid voorstander van een federatie van nationale staten. Wellicht staan de burgers van de eurozone veel meer open voor meer integratie dan de politieke leiders vermoeden. Maar geef hen dan ook echt iets om te kiezen. Als de vijf presidenten dat niet aandurven, is het tijd voor een leerstage bij mijn vrouw. Die lanceert elk uur (teveel) concrete ideeën en keuzes en managet gelijktijdig meerdere projecten. Ach, eigenlijk bedoel ik: mijn vrouw for President. Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

European Court backs ECB

The ECB’s Outright Monetary Transactions (OMT) programme was legal. The European Court of Justice (ECJ) just released its ruling on the OMT, calling it compatible with EU law. Even if widely expected, this ruling still brings a relief at the ECB and in financial markets. However, at least the press release still leaves the door open for new lawsuits against QE. Remember that OMT was the programme the ECB announced back in 2012 when the risk of a Eurozone break-up had increased significantly. It was the incarnation of Mario Draghi’s famous ”whatever-it-takes” speech in July 2012. Back then, the speech and the subsequent announcement of OMT calmed financial markets and spreads on government bond yields narrowed again, assuming that the ECB had finally accepted a role as the lender of last resort. The ECB, however, has never referred to the role of lender of last resort but has always argued that OMT was a sheer monetary policy instrument, targeted at a proper functioning of the monetary transmission mechanism. While markets were cheerful, some Germans were not and started a law suit against the ECB, putting the OMT’s legality into question. With OMT, this was the argumentation, the ECB had crossed the Rubicon, entered the arena of monetary financing and had put German taxpayers (without any accountability) at risk. The lawsuit was filed at the German Constitutional Court. Then, in early 2014, the German Constitutional Court has basically said that it was unable to assess the legality of the ECB’s OMT but if it could, it would deem it illegal. This is why the German judges had referred the case to the ECJ. The ruling The ECJ just released a first four-pager press release with the main argumentation of the ruling. The entire verdict will be released later today. Judging from the press release, the ECJ gives the clear backing to the ECB. According to the ruling, the OMT programme “falls within monetary policy and therefore within the powers of the ESCB”. OMT contributes to the singleness of monetary policy. The ECB’s role in the Troika Today’s positive ruling does not come as a surprise. In fact, the ECJ broadly followed the advice of its Advocate-General Cruz Villalon. This advice was given back in January this year. However, the Advocate-General had pointed out another issue, which is of great interest. In the event of the OMT programme being implemented, the “ECB must refrain from any direct involvement in the financial assistance programme that applies to the State concerned”. Back then a clear sign that the ECB’s role in the Troika should be revisited. Today’s official ECJ ruling – at least in the press release – does not comment on this aspect anymore. Impact on QE There is no doubt that OMT paved the way for QE, even if there are some substantial differences between the two. While OMT has a built-in conditionality and only focusses on the countries applying for OMT, QE is unconditional and purchases are spread across Eurozone countries. Today’s ruling should clearly discourage new lawsuits against QE, though not entirely. The ECJ states that ECB bond purchases could in practice have an effect “equivalent to that of a direct purchase”, particularly when potential purchasers of government bonds in the primary market new for sure that the ECB was buying in the secondary market. In our view, the ECJ kept the door to new QE lawsuits slightly open. Who has the last word? Anyone familiar with lawsuits knows that there is almost always the possibility to continue. This is why even the discussion on OMT might now be entirely over and solved. After today’s ruling, the crucial question is whether the German Constitutional Court will simply embrace the ECJ’s ruling or not. In 2014, the German Constitutional Court clearly signaled its own judgement, namely that the OMT may well exceed the mandate given to the ECB and would be inconsistent with the prohibition of monetary financing of member states. Even if the European Court would rule favorably towards the ECB, the German Constitutional Court made it clear that it reserves its own judgement and that it would not automatically follow the ECJ’s opinion. In its own view, the German Constitutional Court claims to have the last word in extreme cases. However, even if in theory the German Court could still come with a different ruling, it is hard to see that this would really happen in reality. It would lead to a legal conflict between two strong Courts with reputational damage for all. In sum All in all, today’s ECJ ruling should bring some relief to markets. In these times, when Eurozone policymakers are realizing that a Grexit would lead to contagion on financial markets, at least in the short run, confirming and strengthening the ECB’s OMT is almost existential. Up to now, OMT has been the ECB’s most powerful tool, and actually the most powerful tool which did not cost a single euro. The ECJ gave a strong backing to the ECB’s independence and sent a sad message to some Germans: there is European life outside the German borders.

Eurozone - Still united in diversity

The final stage of the Greek saga debuted along the lines of the recent past. Neither side seems in a hurry to bow to the counterparty’s requests. Having irritated EU Commission President Juncker late last week by quipping that the EU suggestions were irrational, on Tuesday the Greek PM Tsipras finally submitted his new proposal to the institutions. As reported by Kathimerini, it foresees an increase in the primary surplus targets to 0.75% of GDP (from 0.6%) for 2015 and to 1.75% (from 1.5%) in 2016 and an upward adjustment to its three-rates original proposal. The Commission’s first reaction was a cool one, focusing on the fact that the proposal contained ideas already rejected in the past rather than on the adjustments to the primary surplus targets and on the new VAT rates. Unsurprisingly, Greek Finance Minister Varoufakis was also dismissive as he defined last week’s creditor proposal a return back to square one, as if the negotiations had not happened. In our view, even if the manners and procedures of this never-ending process will definitely not win any beauty contest, just looking at the sheer facts it seems as if at least headline numbers and targets have converged again – a tiny bit. The issue is not so much numerical targets but rather how to reach them. This is where the biggest discrepancies between Greece and the rest of the Eurozone still exist. The other, probably most controversial issue is the Greek pension system. While the Eurozone demands an overhaul of the system to make it more sustainable, the Greek government refuses any changes. Even if both sides are still well apart, these discrepancies look bridgeable; at least in normal European circumstances. However, the Greek crisis has long ago entered new dimensions. Therefore, it looks as if an old negotiation pattern is currently emerging again: when progress at the technical level failed to materialise, the negotiation table is shifted to the top politicians. Looking at the key players, it seems as if we are reaching the final stage of the negotiations; at least for a short-term solution. After negotiations at the wider European level, including the IMF, it again seems to come down to another Greek-German showdown. These two government leaders will have to decide whether they can pour more water into their wine and still serve it at home as an exclusive drink and not as a cheap spritzer. In this light, observers were yesterday eagerly awaiting a meeting between Tsipras and Merkel at the margins of an EU-Latin America summit in Brussels. However, the two left main actors of the Greek crisis continued their game of chicken, now even at the level on whether or not a meeting would take place. After denials and opposing news, Tsipras and Merkel, supported by French president Hollande, finally met late last evening. After two hours, the meeting was concluded with only one official statement: government leaders had a good exchange of views in a constructive atmosphere. The negotiations between Greece and the three institutions will be continued with high intensity in the coming days. For us, it is hard to tell what really happened during yesterday’s meeting. It all looks as if the psychological game of who will blink first continues.

Column - The Sound of Merkel

Het was hèt plaatje van de G7-top in Duitsland. Angela Merkel in de bergen op de groene alpenweide met gespreide armen voor Barack Obama die ontspannen op een bank zit, of bijna hangt. Bijna een idyllisch tafereeltje uit 'The Sound of Music’. Angela Merkel als de hartverwarmende Maria van de internationale en Duitse politiek. Een Maria echter die vooral opleeft in de bergen en op het platteland, maar niet in de stad. In de schaduw van de G7 en Griekenland was er afgelopen weekend in Dresden een kleine, voor buitenlanders en financiële markten op het eerste gezicht tamelijk onbelangrijke burgemeestersverkiezing. In de hoofdstad van de conservatieve deelstaat Saksen leed de kandidaat van Merkels CDU een pijnlijke nederlaag. Hij haalde slechts 15 procent van de stemmen. Wat kan het de koningin van Europa, de sirtaki dansend voor de Amerikaanse president, nog schelen wat er in een Duitse stad van 500.000 inwoners gebeurt? De nederlaag in Dresden markeert het dieptepunt van een lange, treurige trend. In geen enkele grote Duitse stad zit er nog een partijlid van Merkel aan het stuur. In 2005, aan het begin van haar kanselierschap, zat de CDU nog in 7 van de grootste 15 Duitse steden stevig in het zadel. Ondanks enkele inhoudelijke veranderingen onder het leiderschap van Merkel lukt het de CDU niet aansluiting te krijgen bij de moderne grote steden. Het familiebeeld is weliswaar iets liberaler geworden, maar het blijft nog te conservatief, te veel ruikend naar mottenballen. Er ontbreekt een typische CDU-stempel op het urbane leven. Een echt alternatief voor de fietspad- en patchwork-familie-politiek van andere partijen heeft de CDU niet. Op het stedelijke niveau wordt zo het grootste probleem van de Duitse christendemocraten duidelijk: in het tiende jaar van bondskanselier Merkel is de partij inhoudelijk geïmplodeerd, met weinig geprofileerde mensen. De partij is Merkel, en Merkel is de partij. Het fenomeen Mutti kan voor de CDU nog een nachtmerrie worden. Op een einde van het Merkel-tijdperk is de partij niet voorbereid. En met de steeds toenemende urbanisering in Duitsland zal ook de invloed van het platteland, waar de CDU nog sterk staat, op de nationale politiek steeds kleiner worden. Voor Angela daarentegen maakt dat alles niets meer uit. Zolang haar populariteit bij de Duitsers zo hoog blijft, is zij het laatste houvast voor haar partij. De machtsgarantie. Bij elke nederlaag op regionaal of stedelijk niveau zal haar macht eerder toenemen dan afnemen. Want er is geen alternatief. Zo krijgt Merkel volgens mij ook later nog een nieuw reddingspakket voor Griekenland door het Duitse parlement. Internationaal zal Merkel verder de toon aangeven en elke berg beklimmen. Haar eigen partij wacht evenwel geen hemelse muziek maar rollende donder zodra Angela uitbarst in de klassieker ‘So long, farewell’. Deze column verscheen vanochtend in het Belgische dagblad "De Tijd"

German economy takes head start in Q2

End of industrial hibernation? After three months of struggling, German industrial production finally gained some momentum in April, increasing by 0.9% MoM. On the year, industrial production was up by 1.4%. The increase was driven by almost all sectors. Only the production in consumer goods decreased by 0.9%. The construction sector remains an important growth driver for the entire German economy with an increase of production of 1.3%. At the same time, the statistical office also released latest trade data. Exports increased by 1.9% MoM in April, from a 1.3% increase in March. As imports decreased by 1.3% MoM, the seasonally-adjusted trade balance increased to 22.3bn euro. A new record high. Obviously, today’s trade data will do little to hush the international dispute on Germany’s high current account surplus and might even provide new material for the discussions at today’s G7 meeting. Even if in non-seasonally adjusted terms, the current account surplus has come down somewhat, seasonally-adjusted numbers speak for themselves. The country’s trade balance is moving from one record high to another. While the criticism of too few domestic investments is clearly justified, it is useful to remember that – at least in the German economy – external and internal activities have hardly ever been two sides of the same coin. It is far from certain that more domestic activity, be it consumption or investment, would automatically lead to a significant reduction of the trade surplus. In fact, last year’s growth performance already showed that solid domestic demand can go hand in hand with net export growth. More generally speaking and returning to the short-term growth outlook of the German economy, this morning’s data shows that the economy has left its industrial hibernation behind. Moreover, since the beginning of the year, hard economic data had troubles matching buoyant confidence indicators. With the latest slight weakening of some sentiment indicators, doubts had emerged that it was rather soft indicators currently adjusting downwards towards weaker activity data than the other way around. Today’s data in fact suggest that strong confidence indicators were not simply built on thin air. Looking ahead, today’s data provide a nice head start to the second quarter. After a somewhat disappointing first quarter growth performance, the German economy is about to gain new momentum. Record low interest rates, the still weak euro, low energy prices and the strong labour market are the best prerequisites for another decent growth performance. Interestingly, a recent ECB survey showed that the demand for new loans from SMEs was also increasing. Possibly first signs that even lackluster investment could finally pick up. However, it is far too early to become too enthusiastic. May data will probably be highly distorted by public holidays and vacation. This means that the final verdict on the current strength of the German economy will only come in June.

Eurozone: Final deadline postponed again

The Greek government yesterday bought some new time by officially requesting a bundling of this month’s IMF payments. A move which shows how serious Greece’s financial situation is but also how stalemated the negotiations are. 

As expected, the Greek government pulled out one of its last aces to buy some time. Last evening the IMF confirmed that Greece had requested the bundling of all four upcoming payments for the month June, delaying today’s due payment and the other three totaling around €1.5bn until the end of the month. This is a procedure allowed by the IMF rules but very seldomly used by IMF members. The last one was Zambia in the mid-1980s. By the way, a country which later ended in a debt relief programme.

The bundling takes away some time pressure from the ongoing negotiations between the Greek government and its creditors – negotiations which still seem to be dominated by political rhetoric, atmospherical disturbances and face-savings. At least this is what it looks like from the outside. Greek Prime Minster Tsipras visited Commission President Juncker Wednesday night to present his own reform list. Interestingly, Tsipras did not talk to other Eurozone government leaders but only to Juncker, as he is probably in Tsipras’ view the (only or most) open and flexible player in the entire negotiations. The official statement after the meeting, however, was not very promising. A sentence like “progress was made in understanding each other’s positions on the basis of various proposals” reads a bit like “after four months of negotiations we now at least agree that we disagree”. Moreover, after the meeting, Tsipras had also announced that Greece would pay the IMF today. We know better by now. 

Comparing the leaked information on both Tsipras’ proposals and the Eurozone’s demands, there are still huge discrepancies, explaining why finding a compromise is still so difficult. Basically speaking, the only easy area of negotiations is the labour market. As regards VAT-increases and pension reforms, discrepancies are much bigger. As regards fiscal targets, the Greece government wants a somewhat softer path than the new Eurozone proposal included. The Greek government proposed a target of a 2.5% primary surplus, to be achieved by new privatisations (does anyone still remember the earlier €50bn privatisation programme). This compares with a primary surplus of 3% in the Eurozone proposal and 4.5% in the current bailout conditions. Again, in our view, softer fiscal targets combined with currently lower growth make it hard to maintain the debt targets from the current bailout programme. If debt sustainability is not redefined, the only solution to reach the old debt targets would be higher growth assumptions, loan extensions or some kind of debt forgiveness.

Recent developments have once again shown that deadlines in the Greek crisis almost always turn out to be more flexible and fluid than anticipated. However, one thing is clear: successes of the past are never a guarantee for future success. 

In our view, it is still possible to overcome the discrepancies between the Greek and Eurozone proposal and eventually find a compromise. Even further interim solutions cannot fully be excluded. Interestingly, comments over the last few days referring to the content of discussions hinted at a possible agreement between lenders on the possibility of changing the destination of €10.9bn originally budgeted to refinance Greek banks for other purposed. The only question is whether both (or at least one of the two) sides are willing to poor more water in what both would probably currently rather call a spritzer than real wine.

ECB meeting - Taper tempering

As expected, the ECB did not announce any new policy measures at today’s meeting. While generally speaking, today’s meeting was one of those meetings which do not necessarily require a press conference, ECB president Draghi sent two main messages: the fragile start of a cyclical recovery does not justify any tapering speculations, and, the ECB will not pull the trigger on Greece. The ECB’s macro-economic assessment remained cheerful and almost self-congratulating. The tone on the recovery has become somewhat more positive and risks to the outlook for growth were for the first time in a long while described as “more balanced”, though still at the downside. The ECB staff projections remained virtually unchanged compared with the March projections, forecasting GDP growth in the Eurozone to come in at 1.5% this year, 1.9% next year and 2.0% in 2017. The positive tone was only slightly offset by Draghi’s remarks that the recovery had lost some momentum in the second quarter, which explained why the ECB currently only expected the recovery to “broaden” but no longer to “strengthen”. Cruising along. Interestingly, the ECB takes lots of comfort from stronger domestic demand. In our view, continued deleveraging and still high unemployment make banking on domestic demand as a sustainable growth driver a risky strategy. As regards inflation, the slight uptick of oil prices has pushed up inflation projections for this year to 0.3%. For 2016 and 2017, inflation projections remained unchanged at 1.5% and 1.8% respectively. The ECB’s current economic and inflation outlook could give rise to speculations about an earlier-than-expected end of QE. To tackle any of these speculations, Draghi emphasized several times today that the ECB’s macro-economic outlook was conditional on the full implementation of QE. Moreover, there were three even stronger signals from Draghi that any tapering discussions were premature: 1) the cross-checking part of the introductory statement included a new sentence reading that “…confirms the need to maintain a steady monetary policy course, firmly implementing the Governing Council’s monetary policy decisions”; 2) Draghi said that even if the inflation projections were close to the ECB’s definition of price stability, the ECB was nowhere near fulfilling its target and could even add to the monthly purchases; and 3) any exit strategy was a “high class problem” and not yet discussed by the ECB. Even possible bubbles or misallocations in financial markets were no reason for the ECB to adjust QE. Draghi clearly stated that any possible negative effects from QE had to be tackled by supervisors but not by monetary policy. However, despite trying to temper tapering speculations, Draghi is still struggling to give clear guidance. The question on whether QE could be ended before end-September 2016 if inflation expectations are back at where the ECB wants them before, was unanswered. The story of the hour (or better: days, weeks, months and years), is clearly Greece. Earlier today, some details of the latest – some even call it the last – take-it-or-leave-it offer from Greece’s Eurozone creditors had surfaced. According to media reports, the Eurozone would be willing to adjust Greece’s fiscal targets for the coming years. Instead of a permanent primary surplus target of 4.5% starting next year, Greece would be allowed a softer path, gradually tightening austerity screws from a surplus of 1% this year to 3.5% in 2018. However, it is unclear how the Eurozone creditors want to stick to the same debt targets without debt restructuring when fiscal targets are softened and growth has been weaker. Here, Draghi – who initially didn’t want to comment on Greece at all – said that the ECB wanted Greece to be in the Eurozone but that there was a need for “a strong agreement”. Greece was a viable economy if the right policies were implemented. The ECB was in favour of a strong agreement which provided social fairness and economic growth but also fiscal sustainability and financial stability. Answering to questions on ELA and possible additional haircuts on Greek bonds, Draghi remarked that the ECB would stick to its rules-based approach and the different rules applied to ELA and the ECB’s collateral rules. It is obvious that the ECB will not pull the trigger on Greece autonomously. As long as there is the political will from all sides to find a sustainable agreement, the ECB will continue with its current ELA and liquidity stance. All in all, today’s press conference showed that the ECB is aware of the upcoming tapering speculations and clearly wants to temper them. However, more forward guidance and communication streamlining will be needed in the months to keep speculations at bay. Carsten Brzeski