Friday, June 5, 2015

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.

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