German economy surges in Q1

The German economy grew by 0.7% QoQ in the first quarter of 2016, from 0.3% QoQ in the final quarter of 2015. The strongest quarterly performance since the first quarter of 2014. On the year, GDP was up by 1.6% (in working day adjusted terms). The GDP components will only be released at the end of the month but judging from the available monthly data and the statistical agency’s press release, growth in the first quarter was mainly driven by domestic factors. Particularly, activity in the construction sector boomed on the back of the mild winter weather. The latest recovery of the German economy lasts already for seven quarters. Without the small stagnation in the second quarter of 2014, the economy could now look back at twelve consecutive quarters of economic growth. Very impressive. Moreover, during this lucky streak, the growth drivers have changed. Initially boosted by strong industrial production and exports, the economy is currently much more driven by private consumption, construction and a bit of exports. The industrial backbone has weakened significantly. Looking ahead, at least in the near term, this new growth mix should further support growth. Against this background of a long and strong growth performance, it does not really come as a surprise that many German policymakers have become complacent, some even big-headed, or at least not being very open for criticism or proposals to further improve the economic performance. In fact, today’s data provide new ammunition for the proponents of ‘there is no need for change’. Such an attitude stands in sharp contrast with the latest round of international pressure on Germany to implement some change. After criticism on Germany’s high trade surplus and rather naive recommendations to reduce the deficit, it was then a call to increase domestic wages and investments and has now become a clear disclosure of Germany’s lack of structural reforms. First, there was the OECD calling for tax reductions. Now, very recently it has been the IMF proposing infrastructure investments and new reforms in the labour market and the pension system. While the first two phases of international criticism were easily shaken off by many German policymakers, the latest phase is actually hitting the bull’s eye. It hits the German economic establishment in the heart as they have always been the most vocal advocates of structural reforms elsewhere. Now structural reforms are coming home and it will be interesting to watch what the official reaction to the latest IMF proposals will be. After all, it has always been the German government asking for IMF involvement in the euro crisis management, due to the IMF’s uncontested expertise. However, roughly one year ahead of the next national elections, there is the risk that no new reforms will be implemented before the elections. If true, it could eventually turn out be a missed unique opportunity. Implementing new reforms in good times is always easier then implementing them in bad times. Unfortunately, it almost never happens. Today’s data are another sign of Germany’s economic strength. At least at first glance. The economy defied the financial market turmoil at the start of the year as well as the Chinese slowdown. Even if many Germans don’t want to hear it, strong domestic activity is also the result of the ECB’s loose monetary policy. At second glance, however, the strong growth performance also shows what currently is the biggest risk for the German economy: complacency. Ironically, with growth driven by construction and consumption and a government which is reluctant to follow up on international advice to implement structural reforms, the German economy has almost started to resemble peripheral characteristics.

Last hooray or new fireworks? ECB announces new stimulus package

It was not the white rabbit or the big game changer but it might have been another, maybe the last, coup of the ECB to revive growth in the Eurozone. At today’s meeting the ECB announced several measures which all aim at making financing conditions even more easier than they already were, while at the same time further trying to improve the transmission mechanism of the monetary policy. Here are the decisions in more detail: - The ECB cut interest rates by 5 and 10 basis points respectively. To be precise, the ECB lowered the refi rate to zero, from 0.05%, the deposit rate to -0.4%, from -0.3% and the marginal lending rate to 0.25% from 0.3%. - Monthly QE purchases will be increased from 60bn euro to 80bn euro. - To make higher QE purchases feasible, the ECB will include corporate bonds into the QE purchases and the threshold for purchases of bonds by international organizations and multilateral development banks will be increased from 33% to 50% per issuance. - A new series of four targeted longer-term refinancing operations (TLTRO) will be launched in in June this year. Banks will be able to get ECB money either at the refi rate (now zero) or even at the deposit rate (now -0.4%), depending on the banks’ lending books. These four big measures are supposed interact and gear into each other. Particularly, the reintroduction of the once less successful TLTROs is a clear alleviate the burden of negative rates for banks. For the first time ever, the ECB will pay banks for borrowing money; at least in case banks fulfil certain criteria. For the technicians, banks will be able to borrow up to 30% of the stock of eligible loans as at 31 January 2016. In general, banks can borrow at the refi rate but for banks, whose net lending exceeds a benchmark for lending growth, borrowing at the deposit rate will be possible. While this measure is clearly groundbreaking, it remains to be seen whether it will work. During the press conference, ECB president Draghi admitted that the ECB was “increasingly aware” of the negative impact of negative rates on banks but that this impact differed across the sector. Some banks were more vulnerable than others but the ECB had to look at the entire sector, not single banks. The ECB’s measures were clearly triggered by a significant downward revision of the inflation projections and continued fears of deflation or at least second-round effects from negative inflation rates. The ECB staff projections showed an expected sub-potential recovery of the Eurozone going into 2018, with GDP growth forecasted at 1.4% (from 1.7%) in 2016, 1.7% (from 1.9%) in 2017 and 1.8% in 2018. Risks are still tilted to the downside. As regards inflation, the ECB staff had to pay a tribute to the further drop in oil prices and the strengthening of the euro since the December forecasts. Here, ECB staff now expects inflation to come in at 0.1% (from 1.0%) this year, 1.3% (from 1.6%) in 2017 and 1.6% in 2018. It was this continued undershooting of the ECB’s inflation target as well as the ECB’s determination to never give up, as Mario Draghi said himself, which led to today’s set of new measures. In addition to the announced measures, the ECB gave a strong forward guidance, stressing that interest rates were not only to remain “at present or lower levels for an extended period of time” but also that rates would remain low “well past the horizon of [the ECB’s] net asses purchases”. In short, rate will remain low for the foreseeable future. All in all, the ECB delivered more than market participants had expected. Particularly the part in which the ECB will now under certain conditions actually pay banks for borrowing money came as a surprise. Still, the rebound of the euro exchange rate after comments by Draghi that the ECB could not cut rates as low as it wanted and that it doesn’t anticipate the need for further rate cuts indicates that betting on a weaker euro as the outcome of today’s meeting is risky. Instead, the ECB will hope that this time around the attempt to revive lending and thereby investment will finally work. It is a long shot with an uncertain outcome. We are hesitant to say that this was it. The ECB is clearly determined to continue fighting. Admitting impotence does not seem to be an option. Whether this fight, without support by governments and fiscal policies (the ECB actually gives a gentle nod to investment in public infrastructure), will really lead to a victory against stagnation and oil price driven low inflation rates remains doubtful. The next months will tell whether today was the igniter of a lasting fireworks or just the last hooray.

German Ifo takes a dive in February

Wake-up call. Global events have finally reached German companies’ boardrooms. At least this is one conclusion of today’s Ifo reading. Germany’s most prominent leading indicator, the just released Ifo index, dropped to 105.7 in February, from 107.3 in January; the third decline in a row and the lowest reading since January 2015. Particularly expectations have taken another sharp hit from recent market turmoil, the adverse impact of low oil prices and renewed concerns about a slowing of the Chinese economy, dropping to 98.8 in February, from 102.3 in January. Remarkably, the current assessment component increased to 112.9, from 112.5 in January, indicating that it is fear rather than an already felt decline which is troubling German companies. Earlier this morning, the German statistical office had released details of GDP growth in the final quarter of 2015. The data showed that growth was mainly driven by consumption, more from the public than the private sector, and the construction sector. Net exports had been a severe drag on growth, with (QoQ) exports actually dropping for the first time since 2012. Although looking positive at first glance, these GDP data are already telling a slightly less optimistic story about the German economy. Despite the strong labour market, low inflation, low oil prices and higher wages, private consumption growth slowed down in the final quarter. Back to today’s Ifo index. As so often in the past, even though they probably the most internationally-oriented companies in the world, it took German companies a while to realize that the world outside of Germany has changed. For a while, the cooling of the Chinese economy and the slowdown in emerging markets was more than offset by strong demand from the US and a rebound of activity in some Eurozone countries. Currently, however, as low oil prices are denting US growth prospects, the US economy could no longer be the strong safety net for German exports and industry that it was in 2015. As paradox as it might sound, low oil prices currently seem to do more harm than good to the German economy. All in all, today’s Ifo index sends a strong wake-up call to the German economy: the easy and carefree life on the island of happiness seems to come to an end. For the time being, solid domestic activity should avoid any real negative surprised. Growth on the back of the public sector, consumption and construction activity might shield the German economy from external headwinds, but is clearly not a strategy for sustainable growth in the medium run. Just ask the majority of Germany’s Eurozone peers.

German growth, new risks and Bayern Munich

Now it’s confirmed. The German economy ended the year with a decent growth performance in the final quarter. Despite increasing external headwinds, the German economy grew by 0.3%. This is slightly less than the first estimate for the annual growth number had suggested and probably the result of an entire batch of disappointing hard December data. Compared with the last quarter of 2014, the economy grew by 2.1%. Working-day adjusted, 4Q growth was 1.3% YoY. Details of 4Q GDP will only be published at the end of the month but available monthly indicators and the statistical office’s statement suggest that domestic demand was the main growth driver. Government consumption, a bit of private consumption and another surge in the construction sector supported growth, while at the same time net exports were a drag on growth. Without any doubt, the performance of the German economy since 2009 has been impressive. In 27 quarters, the economy only shrank three times. Moreover, over this period, the economy moved from a purely export-driven model towards a much more balanced model with domestic factors currently shielding the economy against external headwinds. Sadly, as impressive this well-known growth story might be, against the background of latest financial market turmoil, today’s German GDP data almost look like a relict of the good old days. They will do little to nothing to calm markets. Looking ahead, the year 2016 could be more challenging for the German economy than many had expected. Not only due to the refugee crisis and increasing political uncertainty but mainly due to increasing external headwinds. On top of the well-known risk factor like slowing China and emerging markets or a still struggling Eurozone, low oil prices and the possible weakness of the US economy could give the German economy a hard time. In particular, any slowdown of the US economy could turn out to be a double whammy for Germany. The direct impact through weaker demand from last year’s most important trading partner and the indirect impact through a stronger euro are in our view currently the biggest risks for the German economy. To some extent, there are similarities between Germany’s showcase soccer team Bayern Munich and the Eurozone’s showcase economy. At first glance, both performances look impressive and flawless. At second glance, however, weaknesses have emerged recently. These weaknesses have clearly increased the risk for both Bayern Munich and the German economy to surprisingly be knocked off their respective pedestals in the coming weeks and months. Carsten Brzeski

German industry disappoints in December

German industrial production dropped by a depressing 1.2% MoM in December, putting an end to a rather disappointing year for the German industry. This was the sharpest monthly drop since August 2014. On the year, industrial production was down by 2.2%. Looking at the details, there was only one bright spot in the production of intermediate goods (+0.8% MoM). All other sectors saw a decline in production. Parts of this December drop can be explained by the timing of the Christmas vacation which put parts of the production process on halt for almost two weeks in December. However, the fact that industrial production in the final quarter of the year was almost 1% lower than in the third quarter illustrates the general weakness of Germany’s former growth engine. At the same time, exports and imports both dropped by 1.6% MoM in December, narrowing the non-seasonally adjusted trade surplus to 18.8bn, from 20.5bn euro in November. December trade data show that German exporters have also started to suffer weaker foreign demand. Nevertheless, contrary to industrial production, the trade performance over the entire year 2015 was still positive. For most parts of the year, German exports benefitted from a weaker euro. Particularly, exports to the US have benefitted from the sharp depreciation of the euro since 2014. As a consequence, the US has become Germany’s most important trading partner in 2015, taking this number one spot from France. In this regard, renewed fears of a Chinese hard landing should not push the German economy into severe problems. Germany currently exports almost twice as much to the US as to China. Interestingly, help to offset weaker demand from emerging economies did not only come from overseas but also from next door. Exports to the Netherlands also increased strongly in 2015, making the Netherlands Germany’s third most important trading partners, taking both exports and imports together. All in all, this morning’s data were a painful reminder that not all is hunky dory in the Eurozone’s largest economy. In fact, the German “Wirtschaftswunder” has only some domestic magic left. With the strong labour market, low inflation, low interest rates and higher wages, consumption is strong and, in addition, services and the construction sector have become important growth drivers. The German industry, however, is still standing on shaky grounds. While the industry had been able to stomach the cooling of the Chinese economy, the slowdown of emerging markets, the euro crisis and geopolitical risks, it now seems as if extremely low oil prices and the slowdown of the US economy are simply two risks too much for the industry. Particularly, the possible US slowdown could turn out to be the biggest risk for the German economy as it could weaken the country’s most important export driver these days. Moreover, as capacity utilization in the industry is close to historical averages, an imminent investment boost also seems far from certain. Finally, last week’s new orders data combined with dropped product expectations, increased inventories and narrowed order books all do not bode well for industrial production in the coming months.

Solid recovery continues: German GDP grew 1.5% in 2015

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 1.5% in 2015 (in calendar-adjusted terms), from 1.6% in 2014. Without working day adjustments, German GDP increased by 1.7%, from 1.6%. In our view, this outcome suggests that the German economy has probably grown by some 0.4% QoQ in the fourth quarter. However, as no hard data for December has been available so far and the statistical office normal uses extrapolations and historical patterns for its fourth quarter estimates, some downward revisions cannot be excluded. Let’s not forget that the vacation period could have had a negative impact on production in December. Moreover, the statistical office also released a first estimate of Germany’s 2015 fiscal balance, providing more arguments for the critics of too weak German public investment. For the first time since 1961, the German government recorded a fiscal surplus in two consecutive years. According to the statistical office, the fiscal surplus came in at 0.5% of GDP in 2015, from 0.6% GDP in 2014. German austerity fetishists will love it. Already yesterday, the German government reported a federal fiscal surplus, which at the federal level came in at 12bn euro, instead of the initially planned 5bn euro. Previously, the government coalition had already decided to transfer any surplus from the 2015 budget entirely into the 2016 budget and not using the surplus to reduce government debt. The funds are needed to finance the costs of the refugee inflow, which the government has currently estimated at around 8bn euro. The reported surplus now offers additional financing leeway for another 7bn euro. While initially this additional fiscal room for maneuver will be used as a buffer for the refugee costs, it is obviously also grist to the mills of proponents for more public investment. Returning to GDP data, today’s numbers almost close the economic year 2015 for Germany. It was yet another year in which the German economy defied earlier swan songs and, despite many headwinds like the Greek crisis, the slowdown in emerging markets and China and increased geopolitical uncertainties, continued the recovery. The year 2015 clearly marks an important step in the rebalancing of the German economy, as private consumption turned out to be an important growth driver (contributing 1.0 percentage points to growth). Still, despite all talks about the strength of the German economy, it took until 2015 before the current expansion has finally become stronger than the last one between 2004 and 2008. Moreover, it would still need at least two more solid years of growth before the cycle between 1994 and 2000 could be equaled. Looking ahead, the two-speeded recovery, with strong consumption and services on the one hand and sluggish industrial production and exports on the other hand, should continue in 2016. As regards the domestic part of the economy, the year 2016 should bring at least a short-term consumptive stimulus from the refugee inflow and increased government consumption. At the same time, low interest rates, low inflation and high employment should further boost growth. As regards the external and industrial part of the economy, high inventories, subdued order books and weaknesses in several important export markets suggest that the German export sector could soon simply face too many headwinds to prolong the recent success story. All in all, the German economy has once again defied many external headwinds and performed another solid growth year in 2015. However, there are at least two caveats to today’s positive data: firstly, after several years of stellar performances (at least vis-à-vis the rest of the Eurozone), the German economy has returned to normality, hardly outperforming the Eurozone any longer. And secondly, without any new structural reforms and investments it is hard to see any sharp acceleration of the economy any time soon. This might be as good as it gets. Therefore, any celebrations and self-adulations should remain extremely modest.

Column: De sterren voor 2016

Zelfspot is niet de meest opvallende karaktertrek van Duitsers. Zelfs na ruim een jaar weer in Duitsland te zijn, is de humorcultuurschok voor mij nog altijd wennen. Economen moeten hier het liefst ‘Herr Professor’ heten en bloedserieuze analyses voorstellen. Bij voorkeur zwaar aangezet, zoals ‘de vluchtelingen zijn de ondergang van Duitsland’ of ‘Mario Draghi rooft het spaargeld van alle Duitsers’. Dat heeft gewicht. Alleen is het jammer dat aan het eind van elk jaar blijkt dat ook humorloze humor geen garantie biedt voor trefzekere voorspellingen. Daarom nu mijn alternatieve poging om met on-Duitse humor een blik op het volgende jaar te wagen. Te beginnen met Griekenland. Door de aanhoudende politieke chaos, de uitblijvende groei en de volledige uitverkoop van het land kantelt de sfeer onder de Griekse bevolking. De Grieken willen definitief uit de eurozone. Alexis Tsipras wint ruimschoots het nieuwe referendum over de grexit. Deze keer houdt hij zijn verkiezingsbelofte. De Duitse bondskanselier Wolfgang Schäuble, na de zelfstandigheid van Beieren en de val van Merkel de nieuwe regeringsleider van een CDU/Groenen-coalitie, feliciteert Tsipras met de woorden: ‘Sie sind geschafft.’ Als 'wederopbouw Zuid' stuurt Schäuble nog het oude bestuur van Volkswagen en het organisatiecomité van het WK voetbal 2006 naar Griekenland. Ze moeten er bekijken of de Olympische Spelen niet permanent in Griekenland kunnen plaatsvinden en of ze geen milieuvriendelijke investeringen voor de Grieken kunnen binnenhalen. Op hetzelfde moment blijkt dat elke Chinees aan vier iPhonekopieën echt genoeg heeft en dat de consumptie instort. Waardoor de wereldeconomie in een recessie belandt. Na zijn verkiezingsoverwinning kondigt de nieuwe Amerikaanse president Donald Trump onmiddellijk een ongekend stimuleringspakket voor 2017 aan. In elke Amerikaanse stad, al is die nog zo klein, worden wolkenkrabbers en casino’s gebouwd. Trump overweegt ook om wolkenkrabbers uit Londen naar de VS te verhuizen, vanwege de enorme leegstand in de Londense kantoorgebouwen na de brexit. In het Midden-Oosten begint een valutaoorlog. Nadat de prijs van olie onder 20 dollar per vat is gedaald, geven de olie-exporterende landen de koppeling van hun eigen munt aan de dollar op. ECB-president Mario Draghi reageert onmiddellijk met QE3 en QE4. Tegelijkertijd publiceert Commissie-voorzitter Jean-Claude Juncker alweer een nieuw investeringsplan. Dit keer voor een Europees ruimtevaartprogramma. Als er eindelijk leven op andere planeten wordt ontdekt, kan dat de eurozone, door de nieuwe exportmarkt, eindelijk de broodnodige duw uit de recessie geven. Zoals de lezer wel merkt, heeft de aloude Duitse dijenkletshumor mij ook al aangestoken en neemt deze column het glazenbolkijken voor 2016 niet serieus. Echt, wie heeft er eind 2014 de grootste crisissen van 2015 voorspeld? Maar zoals bij elke goede grap zit er misschien toch een druppel waarheid in… Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

Confirmed: Consumers saved the German economy

German GDP growth in Q3 was confirmed at 0.3% QoQ. The second estimate of German GDP growth shows that growth in the third quarter was mainly driven by domestic factors. Private consumption and government consumption grew by 0.6% and 1.3% QoQ respectively. At the same time, domestic investments dropped by 0.3% QoQ and net exports shaved off 0.4 percentage points of growth. The fact that inventories contributed positively to GDP growth (0.2 percentage points) does not really bode well for the fourth quarter. In fact, at least in the third quarter, the German economy has finally become what many international critics had been demanding for a long while: a domestically-driven economy. Interestingly, since the third quarter of 2014, private consumption private consumption has now been on the strongest non-stop expansion since the start of the monetary union. Record high employment, increased nominal wages, low interest rates and low energy prices remain an important growth driver for the economy. Now that the year 2015 has entered home stretch, the year in review stories will again become popular. Looking in the rear-mirror, the year 2015 has been another rollercoaster ride for the economy even if most Germans hardly noticed it. However, the series of external (and sometimes even domestic) shocks the German economy was confronted with has been impressive. Just think of sanctions for Russia, Greece dancing on the edge of an euro exit, China’s slowdown, emerging market troubles, VW, refugees and now terroristic attacks. Needless to say that most – if not all – of these challenges or factors will still be in place next year. To cope with the ongoing and new challenges, the economy will need a more sustainable investment boost. Just banking on the current strength of domestic consumption could be a dangerous strategy. Moreover, a possible consumptive expansion of fiscal policies would obviously increase short-term growth prospects but would do little to substantially increase the economy’s growth potential. Particularly in a possible scenario, in which new uncertainties resulting from the terroristic attacks could further dent investment activity. In short, the second estimate of German Q3 GDP data confirmed that the worst nightmares have not come true. Consumers saved the economy and offset the industrial slump of the summer months, yielding the German economy’s fifth consecutive quarter with positive growth.

Rethinking the overachiever

Mario Draghi’s bold comments have raised the bar for the December meeting to a very high level. What could the ECB actually do? Even after some sleep and several internal brainstormings, it is not fully clear to us why ECB Draghi went as far as he did with his comments during Thursday’s ECB press conference. In our view, it would have been more than sufficient to use the phrase “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”. This alone would have been a clear opener for more monetary action in December. Instead, Draghi himself brought forward the possibility of lowering the deposit rate, mentioned that some Governing Council members had already been in favour of more action at the Thursday meeting and hinted at new, unprecedented action by stating that the Governing Council had tasked internal committees to investigate further measures. All in all, a “work-and-assess” mode that has put market expectations to a (too) high level. The question of why Draghi chose for such boldness will remain unanswered. Is the ECB just overly concerned or are we back in the good old days when central banks had exclusive insight information on markets and economies? Hopefully, the meeting minutes will shed some light on these questions. Looking ahead, all eyes will now be on the 3 December meeting. In our view, despite all boldness, new action is not a done deal, yet. It will be conditional on the next batch of ECB staff projections and, particularly, the inflation forecasts for headline and core inflation in 2017 (1.7% and 1.6% respectively in the September forecasts). Admittedly, inactivity in December would clearly be counterproductive and would lead to a negative market reaction, eventually still forcing the ECB to act. In short, Draghi’s boldness has put the ECB into a position from which it will be very hard to escape without any new action. Based on Draghi’s comments on Thursday, what is the most likely action the ECB can deliver on 3 December? Given that not all members of the ECB’s Governing Council seem keen on stepping up QE, as they either deem it too early or simply ineffective (just think of Liikanen or Weidmann), returning to traditional monetary policy instruments seems like the most viable option. A cut of the deposit rate by 5-10 bp and a cut of the refi rate to zero could be easier digested by the ECB’s own QE critics. The fact that Draghi had several prepared statements at the Thursday meeting on why a rate cut would not lead to a credibility loss (despite last year’s comments that the ECB had reached the lower bound) and the focus on real not nominal rates, suggests that the ECB did already have a very intense discussion on this option. Draghi’s comments that the Governing Council had tasked all relevant committee to investigate other possible measures suggests that the ECB itself is not fully concerned that a simple “more of the same” will do the trick. Stepping up the current QE by either increasing the monthly size or the length of the programme is on the one hand hard to achieve (given that markets have already dried up significantly) and on the other hand will probably not have a huge impact on the economy. In our view, however, it is doubtful that the same committee which prepared QE last year will now all of a sudden find completely new measures no one else had ever thought about before. In theory, possible options might be purchases of corporate bonds, stocks or government bonds of non-Eurozone countries. Is it likely? In our view, not (yet). Notwithstanding the above, the ECB might still be tempted to deliver something on QE. Just in order to meet high market expectations. In this regard, some minor, rather cosmetical, changes to the current QE programme should not be excluded. An increase of the monthly size by 5 to 10bn and an extension of the minimum deadline to January 2017, instead of the current September 2016. The ECB might even consider dropping the reference to a precise minimum deadline. At first glance, this would make the programme look more open-ended than it currently is. However, at second glance, such a move could backfire in a situation in which inflation expectations start to increase before September 2016. Another more elegant way to do something more in terms of QE (probably preferred by the members of the Governing Council more critical of the programme) would be lowering the minimum yield at which the ECB can purchase bond (currently -20 bp), in line with the rate cut on the deposit facility (given the fact that it is not entirely clear whether there is an automatic link between deposit rate and the rate limit for QE purchases). That could also shift the longer end of the yield curve downwards. In the same vein, a further rate cut on TLTROs could be considered. All in all, a rate cut (also applied to the different types of unconventional monetary policy instruments), possibly combined with some cosmetic tweaking of QE look like the most likely next step for the ECB. Will it help? The ECB thinks it does. And, indeed, judging from Thursday’s market reaction, it should – at least initially – weaken the euro exchange rate. However, as it always needs two to tango, this ECB strategy would only work if the Fed would really start hiking interest rates. In this regard, any market and ECB enthusiasm could easily end with a hangover two weeks later when the Fed meets on 16 December.

German Ifo drops in October

Surprised but not frightened? German businesses showed an interesting reaction to the recent series of uncertainties and turmoil. In fact, the reaction can be summarized as impressed but not frightened. Germany’s most prominent leading indicator, the just released Ifo index dropped to 108.2 in October, from 108.5 in September. The first drop since June this year. Interestingly, the drop was exclusively driven by a weaker assessment of the current situation. The expectation component, on the other side, increased to 103.8, from 103.3, continuing its recent positive trend and actually reaching the highest level since June last year. Of course, one should not interpret too much in a single confidence indicator but today’s Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off and also shrugs off the risk from a possible Chinese and emerging markets slowdown. Despite these external uncertainties and regular concerns about the real strength of the German economy, German business remain highly optimistic. There are two possible explanations for this trend: either German businesses are naive optimists or ice-cold realists, sticking to the facts. In our view, there are many arguments in favour of the latter. Admittedly, the latest drop in new orders and shrining order books has dented some optimism on the outlook for the German industry. However, continued growth in the service sector, strong domestic demand and an outside world that might be slowing but is definitely not falling off a cliff, should keep the German economy on the sunny side. Finally, let’s not forget that the German economy is one of the largest beneficiaries of the ECB QE programme, taking immediate support from a weak euro and low interest rates. Needless to say, not all is well in the land of cars. The lack of new structural reforms, the unfinished energy reform and too few domestic investments will eventually hit the economy. Moreover, the inflow of refugees, while being short-term stimulus for domestic demand, is the biggest challenge for Germany in decades, posing both enormous risks and opportunities, but in anyway asking for unprecedented and lasting flexibility of both the society and the economy. All in all, today’s Ifo index shows that the German economy is not totally immune against external slowdowns and internal scandals. However, there is no reason at all to fear an abrupt slowdown of the Eurozone’s biggest economy

Column: Over Merkel, emoties en Waterloo

Angela Merkel is alom bekend als politieke overlevingskunstenaar. Haar doormodderen en strategisch overnemen van standpunten van de tegenstander is haar op verwijten van visieloosheid en draaikonten komen te staan. Niet de wens het klimaat te redden, maar wel de (bijna) kernsmelting in Fukushima en het aangewakkerde anti-nucleaire sentiment deden de bondskanselier plots van standpunt veranderen. Met deze geniale draai veegde zij in een keer het partijprogramma van de Groenen van tafel en maakte zij van Duitsland een voortrekkersland in energie. Duitsland sinds jaar en dag vrijwel het laatste land zonder wettelijk minimumloon? Merkel maakt er haar speerpunt van en haalt de socialisten links in. Over Merkels draaikonterij in de eurocrisis, van géén hulp tot een derde pakket voor Griekenland, is inmiddels ook al alles gezegd. Merkel is de Houdini van de Europese regeringsleiders, een boeienkoningin, die zich uit elke val weet te bevrijden. Zij is een meester in het aanvoelen van de publieke opinie, terwijl zij zelf nooit op emotie is betrapt. De vluchtelingencrisis heeft dit veranderd. De Duitsers laten nu een groot hart zien. Vluchtelingen worden ruimschoots opgenomen, juichend met dekens en knuffels ontvangen op treinstations en de bereidheid hen te helpen is groot. Tienduizenden vluchtelingen lopen op de snelweg in Hongarije, ‘Germany, Germany’ en ‘Merkel’ roepend. Kan Duitsland die toeloop aan? ‘Wir schaffen das’ (dat krijgen we voor elkaar), beweerde de bondskanselier stellig. Dat was een week geleden. Nu zijn de grenzen dicht, zijn de opvangkampen, sporthallen, stations en lege scholen overvol en luidt elke deelstaat de noodklok. En de opvangbereidheid in de andere EU-lidstaten laat te wensen over. De vluchteling-stroom en de hoop op een betere toekomst in ‘Germany’ zijn alleen maar groter geworden. Heeft de best geïnformeerde vrouw van het westelijk halfrond werkelijk niet voorzien dat de genereuze opname van de vluchtelingenstroom de poorten alleen maar verder zou openzetten en dat de voorzieningen in een week uitgeput zouden zijn? Dat er zicht is op een bevolkingsaanwas van 12,5 procent in één jaar? Licht hierop werpt nu - na sluiting van de grenzen en de vraag of Duitsland zich niet moet verontschuldigen vanwege de gastvrije ontvangst van de vluchtelingen - haar uitspraak ‘Dann ist das nicht mein Land’. Merkel toont emoties. De ironie van de geschiedenis is dat net nu Merkel eindelijk emoties laat zien, dit haar einde kan inluiden. Want Duitsers zijn vriendelijk en zullen helpen bij humanitaire nood, maar ook Duitsers willen niet naast een vluchtelingenopvanghuis wonen en sturen hun kinderen naar een witte school. De grenzen kraken en de publieke opinie en de eenheid binnen de christendemocraten vertonen al de eerste barsten. Elke leider vindt vroeg of laat zijn Waterloo. En wat is er mooier voor een christendemocrate dan ten onder te gaan aan barmhartigheid? Deae column verscheen vandaag in het Belgische dagblad "De Tijd"

Eurozone - Return to calm but not normality

The payment of ECB and IMF obligations seems to be topping the institutions’ scale of priorities. The disbursement of the €7.16bn EFSM bridge loan, approved last Friday, has allowed Greece to meet its compelling short-term obligations. Yesterday, the Greek government disposed both the reimbursement of the €3.7bn bond held by the ECB and the payment of around €2bn to the IMF. As confirmed by IMF spokesman Gerry Rice, Greece is no longer in arrears to the IMF. In another step in the search of normality, Greek banks were allowed (upon the positive advice of the Bank of Greece and the ECB) to re-open yesterday. While many of the capital controls will remain in place, partial functionality should nonetheless help customers. They can now cumulate the €60 daily withdrawals into a single weekly withdrawal and have re-gained access to their bank deposit boxes. With cash holdings in boxes reportedly amounting at around €10bn, this could be another handy source of short-term personal liquidity. The government reshuffle put in place by Tsipras over the weekend was not a game changer. Sure, it proved that in principle the party leadership is keen to re-build reciprocal confidence with lenders and that is unwilling to accept ambiguity when working for a third package. However, for the time being, the destiny of the 39 rebels (who voted against the bill or abstained) has not been decided yet. Tomorrow, the Greek Parliament will vote on the second set of prior actions agreed with lenders: these will include a new code of civil procedure and the adoption of the EU’s Bank Recovery and Resolution Directive (BRRD). In view of the vote, it seems reasonable to expect a replication of the voting pattern shown last week. While the passage of the bill does not seem at risk, the outcome of the vote deserves attention, as any further haemorrhage of support from Syriza’s MPs could in principle weaken Tsipras’ position, pushing him to seek snap elections in the autumn. A positive passage of the second bill should in principle pave the way to the quick start of actual negotiations. With representatives of Greece’s creditors (the former Troika) and of the ESM reportedly already in Athens, pressure for a rapid agreement on the memorandum of understanding of a third programme is already mounting. Yesterday, the president of the EU Commission, Juncker, and of the Eurogroup, Dijsselbloem, said that the Greek parliament must complete the bailout agreement with the ESM within two weeks, as this would allow the disbursement of funds in time for Greece to meet its August financial obligations (another ECB held bond matures on 20 August). At the same time, German politicians are still licking their wounds after last week’s agreement to reach a deal. It still does not feel good. According to media reports, there had been different views on Greece and a possible Grexit between Chancellor Merkel and Finance Minister Schäuble. While Schäuble is still flirting with the idea of a Grexit and even hinted at the possibility of his own resignation, Merkel remarked during a television interview that the Grexit discussions should be stopped. The negotiations had started. Some calm has returned to Greece. After last week’s turbulences, yesterday marked the first day of Greece in a new environment. An environment, in which banks are a bit more open but not really open, taxes are higher and Greece has fulfilled short-term payment obligations but is still struggling to find a third bailout. Clearly not a return to normality.

Eurozone - Leap of faith

As expected, today’s ECB meeting was all about Greece. ECB president Draghi did not only answer many questions, he also delivered tangibles for Greece: a minor increase of ELA for one week. Together with the Eurogroup’s parallel decisions to grant bridge financing of 7bn and a principle agreement to grant a third bailout package, the Eurozone’s key players took an enormous leap of faith with Greece. As regards the macro-economic situation, the ECB’s analysis and outlook did not change from last month’s. The ECB still expects a broadening of the Eurozone’s economic recovery and gradually increasing inflations rates. Interestingly, the ECB added the slowdown in emerging markets to its downside risks to growth. Remarkably, despite the broadly unchanged macro-economic assessment, Draghi gave an important hint that market participants should forget about tapering any time soon. The ECB reincluded an important paragraph to its introductory statement, saying that the ECB would “continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability. If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate.” In our view, a clear sign that – contrary to what the ECB said in early June – the ECB is concerned about the sell-off in bond markets and would react by stepping up, rather than reducing its QE activities; at least as long as the recovery is as fragile as it currently looks like. Most of the press conference was dedicated to Greece. Here, Draghi gave many long explanations and statements on the current state of play. The most remarkable two comments and announcements were: i) the ECB decided to increase ELA for Greek banks by 900 mln euro for one week. With this decision, the ECB fulfilled the request of the Bank of Greece and at least symbolically rewarded latest progress in the Greek crisis. ii) Draghi joined the current choir on debt relief for Greece, saying that “it is uncontroversial that debt relief is necessary”; and iii) Greek bonds would become eligible for the ECB’s QE programme once there is a bailout deal and the ESM has disbursed the first tranche of the money. And there was more news from the Eurozone today. After the principle decision that the Eurozone would offer Greece a 7bn euro bridge financing through the Commission’s rescue fund, the EFSM, the Eurogroup today also reached out to Greece. At the same time that the ECB press conference started, the Eurogroup issued a written statement, welcoming last night’s parliamentary green light for the Greek reforms. Moreover, the Eurogroup said that it would in principle grant a three-year bailout package to Greece, obviously only when all conditions as laid out in Monday’s agreement are met. All in all, let’s not get carried away by too much pathos. The Eurozone finance ministers just confirmed what their chiefs had already decided on Monday. Let’s stick to facts: Greece last night took an important first step towards receiving a third bailout package. More important and complex steps and negotiations will still follow. The decision to grant bridge financing as well as today’s ECB decision to increase ELA are no game changer, yet, but at least a symbolic leap of faith.

Eurozone - A deal to reach a deal

Grexit avoided, but for how long? After another marathon in Brussels, Eurozone leaders just decided on a path towards a third bailout package for Greece. We are still waiting for the official and written summit declaration to be released but here is our first take on the deal, based on having listened to the press conferences of Tusk, Juncker and Dijsselbloem as well as the ones of Merkel, Hollande and Tsipras. In short, the Greek government will now have to do almost everything the Greek people refused in last week’s referendum. As already reported earlier this morning, Eurozone creditors have come up with several demands before agreeing to a third bailout package. This compromise can be divided into three categories: i) rebuilding trust; ii) negotiations on a third bailout package; and iii) how to deal with Greek debt. As regards rebuilding trust, the Eurozone wanted Greece to pass several reforms through parliament by Wednesday, among these reforms were apparently the VAT and pension reforms but also improvements of the Greek statistical agency. Once the Greek government has agreed to the reforms, several Eurozone parliaments would decide on whether or not the official negotiations could be started. Only then, the negotiations between the three institutions (IMF, ECB, European Commission) on behalf of the ESM would start. Judging from earlier reports last night, these negotiations will not be easy as the Eurozone creditors have asked the Greek government to come up with new and more concrete proposals on how to compensate for the earlier withdrawn reforms to the economy and the public sector. If and when these negotiations would come to a successful end, Greece would get a bailout of around 85bn euro. Already in the coming two months, Greece would need 7bn euro until next week Monday (remember the bond held by the ECB), another 5bn euro until mid-August and up to 25bn (of which 10bn should be immediately) for the Greek banks. A prominent part of the potential deal, at least judging from the press conferences, is a privatization trust fund. This fund, based in Greece, should guarantee fresh money of 50bn euro, of which 12.5bn euro should be used for domestic investment. The rest of the money would be for debt repayments. Furthermore, the Troika is back. As stressed by Ms Merkel, the three institutions, formerly known as the Troika, will do the negotiations and would also be responsible for future surveillance and monitoring of progress. As Ms. Merkel said a third bailout package for Greece would not differ from earlier programmes or programmes for other Eurozone countries. Finally, the Eurozone returned the idea of some debt restructuring - not forgiveness – as part of a third bailout. The 2012 agreement of the Eurogroup was taken as a point of reference for some kind of debt relief. However, Ms. Merkel stressed that a haircut on debt was not an option but that debt relief could come in the form of longer maturities and/or grace period. Interestingly, she said that this form of debt relief could come earlier than anticipated in the 2012 statement. As regards the next steps, the Greek parliament now will have to pass the required reforms, then national Eurozone parliaments will have to give the green light to start the negotiations. Next week, the negotiations on a third package could start. In the meantime, the Eurogroup will look into options for bridge financing. While all leaders tried to give the deal a positive spin, doubts and concerns in our view outweigh optimism and euphoria. It starts with the fact that there actually is no deal, yet. This morning’s “deal” is an agreement to start negotiations once certain conditions are met. It’s a declaration of intent. Moreover, there is little in the deal that could give the Greek economy a short-term boost. Neither the 12.5bn from a still to be built trust fund nor the promised 35bn investment from the Juncker plan are tangible enough to provide results. Furthermore, even if Greek parliament would pass the required reforms, it is unclear whether Tsipras could politically survive the negotiations. In fact, this looks like a deal, he had been fighting against for a long while. All of this means that the champagne bottles should still remain in the fridge for a while. Eurozone politicians should rather be prepared for additional long meetings and negotiations. This morning’s agreement is a typical European fudge, made possible by the fact that the Greek people are currently still overwhelmingly in favour of Eurozone membership and the Eurozone’s willingness to avoid Grexit. This is not the most stable fundament for sustainable calm. To the contrary, the Grexit might have been avoided for a couple of weeks or – in a best-case scenario – for a couple of months, but as in any good horror movie, the ghosts will always return.

Eurozone: A Pyrrhic 'no'?

The ‘no’ vote in yesterday’s referendum seems to have strengthened Tsipras’ position. However, what looks like a stunning victory could quickly become a Pyrrhic ‘no’. The Greek people yesterday sent a strong message to the rest of Europe: a ‘no’ against austerity. According to the latest results, more than 60% of the Greek people said ‘no’ in the referendum. Officially, this ‘no’ was against a proposal from Greece’s creditors on 25 June to extend the bailout agreement against certain conditions. Whether the ‘no’ was also a vote against Greece’s membership within the Eurozone will never be clear. Ahead of the referendum, there was lots of speculation on what would happen if…now that there is clarity on the outcome of the referendum, the only thing that is clear is that nothing is clear. Only the coming days and hours will show what all involved players are really up to. In our view, the most likely next step is that the Greek government will want to return to Brussels to negotiate a new package with its Eurozone creditors, now backed with a strong mandate of the Greek people. It is hard to tell what the new demands or proposals of the Greek government will really be. The range of demands varies highly between different members of governments, ranging from a democratic change for Europe to no new austerity. The only element that will clearly be in any new Greek proposals is debt relief. In our view, the Eurozone will wait for Greece to make the first move. Initially, the Eurozone will insist on the technical issue that there no longer is a Greek bailout programme and that the Greek government would have to apply for a new programme. Interestingly, the German parliament and other parliaments would have to agree to a start of new formal negotiations. In this regards, it is noteworthy that new negotiations with Greece could also put the Eurozone’s inner stability to a test. It will not be easy to find a common strategy for any new negotiations that will be embraced by all Eurozone countries. Still, even if it is hard to see that the other Eurozone countries will give their Greek colleagues a warm welcome and that new negotiations are more fruitful than over the last five months, the outcome of the referendum will push the rest of the Eurozone to at least start talking. In theory, a compromise could be possible. A deal with less austerity but serious reforms, including tackling corruption and tax evasion, in Greece, obviously, would be the best outcome. Such a deal could even include some debt relief, but at the end of the ride and not upfront. This, however, would require that all parties involved could jump over their own shadows. In particular, the bad blood created by sometimes excessively inadequate language will be a large liability for any new negotiations. While politicians in the Eurozone are preparing for possible new talks, it is once again up to the ECB to do the dirty work. Today, the ECB will have to decide on what to do with ELA. Apparently, the Greek central bank applied for an increase of ELA. The ‘no’ has not made the ECB’s life any easier. With every step that Greece is moving closer to total default or even a Grexit and Greek banks are losing deposits, it will be harder for the ECB to label Greek banks as solvent, and thereby eligible for ELA. In our view, the ECB will not be the one pulling the trigger on Greece. As long as Eurozone politicians will signal their willingness to negotiate with Athens, the ECB will keep ELA at its current levels – even if it will create a bigger headache in Frankfurt every day. Still, this strategy will come to an end on 20 July. If Greece is not able to reimburse the ECB and would default on the bond, it is very hard to see the ECB continuing ELA. All in all, the ‘no’ vote in the referendum will lead to the expected uncertainty. At the current junction, the ‘no’ vote is not (yet) a first step towards a Grexit. Even if Eurozone politicians won’t have a huge appetite to talk to possibly triumphant Greek counterparts, they will never refuse initial talks. How such negotiations will end is hard to tell. A lot will depend on how ready to compromise both the Greek government and the other Eurozone governments are. We still think that eventually a sustainable compromise can be reached. However, the risk for a Grexit has never been higher than today. To a large extent, the current situation brings the Eurozone and Greece back to square one. Square one as it looked like in January: the Greek people have voted against austerity, the Greek government wants debt relief from its Eurozone peers and the Eurozone has troubles finding a united reaction. The big difference with January, however, is that lots of bad blood is on the floors, Greek banks are closed and Greece does not have a bailout programme. These three factors clearly do not argue in favour of a strong Greek position vis-à-vis the rest of the Eurozone. Did Tsipras celebrate a Pyrrhic ‘no’?

Eurozone: Tactical blame game moves on

Yesterday was another day with tactical moves from all sides in the Greek crisis and a Socrates-like conclusion: all we know is that we know nothing… Day one after Greece’s default on the IMF, which officially is not called default, and the end of its bailout programme offered again plenty of turbulences. A new letter from Tsipras, speculation about a cancellation of the referendum, Angela Merkel in the German parliament, Tsipras on television, a Eurogroup conference call and Varoufakis on the internet. This is the summary yet another ‘normal’ crazy day in the Greek crisis. Early in the morning, the media reported that Alexis Tsipras had sent a letter to the Eurozone creditors, claiming that he would accept almost all demands from the creditors with only minor changes. Creditors took their time to examine it thoroughly, postponing the planned Eurogroup teleconference to late afternoon. In the meantime, speculation emerged that Tsipras might still cancel the referendum and Eurozone politicians sent mixed signals. While French Finance Minister Sapin said he was still hoping to find an agreement ahead of the referendum, German politicians closed the door for negotiations before Sunday. Both Schaeuble and Merkel voiced their irritations with the Greek government and reiterated their position that no new negotiations with Greece were possible before the Sunday referendum. Interestingly, Merkel’s official stance has changed compared with several weeks ago. She now remarked that the door for Greece was not locked and that Greece should stay in the Eurozone, though not (any longer) at any price. After Merkel’s speech in German parliament, Tsipras made a televised address to the nation, turning again defiant. He confirmed that the referendum would be held on Sunday and urged his fellow citizens to vote no, reassuring Greeks that a no would not mean a rupture with Europe, but instead a necessary step for a better agreement with lenders. Later in the evening, the Eurogroup officially refused Tsipras’ request, postponing any further discussion to after the referendum. The Eurogroup also repeated that an extension of the bailout was no longer possible and that any new negotiations would start from scratch. Finally, Greek Finance Minister Varoufakis presented his six arguments for a “no” vote at the referendum in his blog on the internet. No matter how this crisis will end, at least Varoufakis has definitely brought new transparency to the Eurogroup. His article, however, is not very substantial, five out of six argument can be summarised as “vote ‘no’ because the creditors won’t give us debt relief”. Trying to understand why Tsipras does what he is doing, the only explanation is that his letter to the Eurogroup was just another tactical move to stay ahead of the Eurozone in the ongoing blame game, rather than a serious change of mind. The answer by Merkel and the Eurogroup was a strong signal that the Eurozone will not move anymore ahead of the referendum. Even if an agreement would be possible, too much trust has been destroyed that it is hard to see that the Eurozone would believe Tsipras this time around. What if he signs an agreement? The Eurozone would not have any evidence that this time is different and that the reforms would really be implemented. All of this means that the blame game will unfortunately continue in the days leading to the referendum. The only clarity that yesterday’s events have given, is that any spectacular and unexpected new turns before Sunday should be excluded. At least some clarity. However, for those hoping for clarity after the Sunday referendum, here is our disappointing view: the mess will go on. No matter what the outcome of the referendum will be. Let’s have a quick look at what could happen. In case of a ‘yes’ vote, the Eurozone would be willing to start new negotiations quickly but probably not with the current Greek government, rather with a government of national interest or a new government after new elections. The Eurozone would probably offer a third programme, coupling reasonable fiscal discipline (without excessively ambitious primary surplus targets) with a population/growth friendly investment programme. This could have a strong power against the surging populist movements in Spain and Italy. However, what would happen if Greece would get new elections and Tsipras would win them? In case of a ‘no’ vote, of course, things would be much more complicated. Tsipras would take it as a popular mandate for new negotiations in Brussels. It is hard to see that after the last events, the Eurozone has a huge appetite for these negotiations. On the other side, however, ignoring the Greek peoples’ will would also be hard. In our view, the Eurozone would not immediately let Greece fall after a ‘no’ vote but it would be very difficult for the ECB to continue ELA, even not at its current level. Even if negotiations between the Eurozone and Greece would continue after a ‘no’ vote, these negotiations would be very likely too difficult, defiant and slow for the ECB not to stop ELA. A new chaos and eventually a Grexit in the making. The inconvenient truth on the Greek referendum is that neither a ‘yes’ nor a ‘no’ vote will quickly lead to a solution and a return to normality.

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.

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.