It has been an long and arduous journey hitherto. We have tirelessly covered the events and putting fourth analysis since nearly 3 weeks ago, days before Greece called for a historical public referendum on to future in the single currency bloc. Things have without doubt settled down, but only by a modicum.
If asked, we would say that Europe is still in the eye of its storm. Greece has had many chances to prove that it wants and deserves to stay in the Eurozone, and we feel it has blown them all. Incessant rhetoric shewing from the Greek government not only reeks of grotesque hypocrisy but further flummoxes the already untidy scene.
The grand gambit by Tsipras and his close aides have only plundered the nation deeper into darkness as a 2-week bank holiday with capital controls is set to extend to its third. The Athens Stock Exchange has similarly been shut for close to 3 weeks now as Greek banks remain insolvent and illiquid.
More importantly, it is the ordinary Greeks on the street who are suffering the most agonizing pains. This is perhaps an understatement when we think about how their government has time and again promised something but failed to keep it.
Such is the narrative when Prime Minister Tsipras inches towards a deal which would seal the fate of all Greeks to another 3 years of austerity and tough reforms, all in spite of a resounding "no" vote to austerity 10 days ago.
It seems that for Greece, her creditor, and the staunch Eurocrats, the abhorring story of kicking the can down the road must continue regardless of the cost.
And The Latest...
- Greece and the euro are 'saved'.
- Greek banks will open Monday, previous statement was a rumor. Withdrawals are limited to €420 per week, not €60 per day.
- Greek Finance Ministry says banks will not reopen on Monday, reversing on previous statements.
- Euogroup approves €7.16bn bridge loan to Greece. ECB to be paid Monday.
- 439 German lawmakers voted for Greek bailout, 119 voted against. 40 abstained.
- Greek banks to reopen Monday, capital controls to remain at €60 per day.
- ECB raises Greek ELA by €900mn over one week.
- Eurozone nations agree in principal on €7bn bridge loan to Greece.
- Greek parliament votes 229 for and 64 against new bailout measures, 6 abstained.
- European Commission looking to secure €7bn bridge loan lasting 3 months for Greece.
- Bridge financing loan for Greece said to be from European Financial Stability Mechanism (EFSM), UK objects. Conditional on Greek parliamentary approval of bailout.
- Wednesday is the deadline for Greek lawmakers to approve new deal.
- IMF dissents, demands debt relief for Greece. Publishes latest Debt Sustainability Analysis Report on Tueaday.
For The Record...
Greece is saved, the euro is preserved. Greek banks are open; the ECB has started their usual weekly trickle down liquidity cap increases to Greek banks; Tsipras remains in power and is well supported; talks can officially begin between the Hellenic Republic and the Troika.
The eye of the storm has certainly passed this time, after a snafu on a grand level which at one point in time threatened to topple the domino blocks. The holes of the sinking ship are now being papered over, in hopes that we will never see another episode reminiscent of the recent.
As an imminent result, there will be nothing much left to opine on. But as our 3-page missive comes to a close, we would like to keep this for the record.
Broadly speaking, there should be more downside than upside to the euro. Counter intuitive it may be but from where we stand, we see a lot of basis to this thesis. A Grexit would have been bullish the euro in the short and long term. Kicking the can, as Europe has chosen to do, will be bearish - as is the original motivation for the euro's creation.
Boosting exports with a cheaper currency will always remain in the favor of Germany and key exporters. And we are pretty sure that it will be kept that way. Trade accordingly.
Greece Crawls Back To "Normalcy"
Unfortunate that said normalcy in Greece's circumstances is not what most seem as normal. At 8am Monday morning, Greek banks opened their doors after 3 weeks of closure; this gave many Greeks a much overdue respite from one the darker interludes the country had endure.
Capital controls have become more flexible but will remain firmly etched in place. There is now a weekly withdrawal limit of €420, which equates to an average of €60 per day. However, depositors can withdraw any amount up to the weepy limit in a single transaction. More flexibility, but materially similar to previous rules.
Greek banks are prepared for a front-loaded outflow of money and we suspect many Greeks are itching to wipe their bank accounts clean, preferring to have their money under their mattresses than with banks they cannot ever -again trust.
More from AP:
"In downtown Athens, people lined up in an orderly fashion as the banks unlocked their doors at 8 a.m., taking a number and reading the paper as they waited for their turn at the till.
Many restrictions on transactions, including cash withdrawals, remained, however.
The Greek government kept the daily cash withdrawal limit at 60 euros ($65) but added a weekly limit of 420 euros ($455) that will be available beginning Sunday. This means depositors who don't make it to the bank on Monday to withdraw cash could pull out 120 euros ($130) on Tuesday instead, and so on, so Greeks don't have to feel they need to visit an ATM every day.
Bank customers will still not be able to cash checks, only deposit them into their accounts, and they will not be able to get cash abroad with their credit or cash cards, only make purchases. There are also restrictions on opening new accounts or activating dormant ones."
While the €900mn increase in the ECB Emergency Liquidity Assistance to Greece will be valid until the ECB meets again later this week, it is not unrealistic to expect liquidity amongst banks to remain a epitomized problem for policy makers and the Greek government. The last thing Greece needs is another bank holiday.
The new normal for ordinary Greeks entails harrowing prospects of much higher taxes (a 23% VAT vs. 13% previously), a stricter pension system, and the much dreaded wave of privatizations what will almost certainly see thousands of public sector works axed.
Life in Greece is about to get much harder, once the fleeting sense of relief passes and reality hits hard. Higher taxes increases the cost of living, and is counter-productive to demand. There is now a dim light at the end of this tunnel, but it might as well not exist.
It is widely documented that Greece's economy remains in a deep recession with no logical way out now that its government has signed itself to many moe years of austerity and reforms that act as brakes to any possible cyclical spurt of recovery.
Ex Finance Minster Yanis Varoufakis has condemned the latest bailout program, saying it is destined to fail. We tend to agree with the outspoken motorbike-riding academic. However, we should understand that Greece had a choice between leaving the euro and staying with it. It chose the former and will therefore have to bear the costs associated with up keeping the status quo.
In more current news, Greece will go head in settling €3.5bn of ECB debt due end Monday, after which the liquidity trickle from the central bank's ELA tap is expected to be hastened. Markets are taking this positively.
Over the weekend, the IMF and anyone with a semblance of common sense had their hopes doused with cold water. Hopes of a Greek debt relief were killed when none other than Europe's Zeus, Angela Merkel, said that any haircut cannot happen in a currency union, reiterating Germany's hardline stance on this sensitive matter.
It will be interesting to see how negotiators square this fundamental circle when formal discussions begin later this week.
More from Bloomberg:
"A classic haircut -- writing down 30 or 40 percent of the debt -- this cannot happen in a currency union," Merkel says in interview with German broadcaster ARD. "You can have it outside a currency union, but you can’t have it in a currency union."
“Part of the wish for Greece to remain in the euro area is that such a haircut is not possible,” Merkel says
Merkel says euro leaders will discuss extension of Greek debt maturities and easing interest rates “when the first successful assessment of the program being negotiated now is completed.”
“Exactly this question will be discussed then,” Merkel says on debt relief. “Not now, but then.”"
€7.1bn Bridge Loan Approved, ECB Will Be Paid
Earlier on Friday, the Eurogroup announced that it had granted Greece a €7.16bn bridge loan under the EFSM with a maximum tenure of 3 months. This was a non-event as markets had anticipated this outcome after the Greek parliament passed the €86bn ESM bailout program.
The implications of this are mostly positive. The ECB will paid €3.5bn on Monday, while Greece has €3.6bn more in cash to live with. The cash-strapped nation will have to make do with the remainder of the sum until the ESM bailout package has been formally finalized, a process which could drag on for weeks on ends.
Update: Greek banks will open Monday
In a twist to the plot, we have just learned that Greece's Finance Ministry said that Greek banks will not reopen on Monday, and the existing bank holiday would be extended beyond 19 July. Athens had previously said that banks would be able to roll up their shutters come Monday.
A complete reversal from what seemed to be a dim light at the end of a very dark tunnel for Greek depositors. We find it hard not to diss at this decision, especially after the country has received a bridge loan which would at least buy it a few more weeks of time.
Perhaps the banks are facing capital shortfalls that are way beyond what is widely believed to be the case, and probably far greater than the €25bn estimate by the Eurogroup. Only time will tell. But for now, Greek depositors will have to continue waiting.
The official statement from the Eurogroup:
"On 17 July 2015, the Council adopted a decision granting up to €7.16bn in short term financial assistance to Greece under the European Financial Stabilisation Mechanism (EFSM).
The loan will have a maximum maturity of three months and will be disbursed in up to two instalments. It will allow Greece to clear its arrears with the IMF and the Bank of Greece and to repay the ECB, until Greece would start receiving financing under a new programme from the European Stability Mechanism (ESM).
Longer term programme
On 16 July the Eurogroup decided in principle to agree to a request made by Greece on 8 July 2015 for stability support over three years from the ESM. Once negotiated between the institutions and Greece and approved by the Eurogroup, the ESM assistance would be used, amongst other things, to repay the loan Greece receives under the EFSM.
Economic policy conditions
The Council also adopted a decision approving a macro-economic adjustment programme setting out specific economic policy conditions attached to the financial assistance. The reforms undertaken by Greece are aimed at improving the sustainability of its public finances and the regulatory environment. Specifically, Greece was required to adopt legislation to reform its VAT and pension systems, strengthen the governance of the Hellenic Statistical Authority (ELSTAT), and implement by 15 July 2015 the relevant provisions of the Treaty on Stability, Coordination and Governance. The adjustment programme will be set out in a memorandum of understanding (MOU).
The financial assistance would be disbursed once the MOU and a loan facility agreement setting out in detail the financial terms have entered into force. Both are to be signed by the Commission and the Greek authorities.
Full safeguards for non-euro area member states
A mechanism has been designed so as to ensure that non-euro area member states do not carry any risk. Under the decision, the exposure of non-euro area member states will be fully guaranteed by liquid collateral under legally binding arrangements. If Greece were unable repay the loan in accordance with its terms, any liabilities incurred by non-euro area member states would be immediately reimbursed.
Declaration on future use of the EFSM
The Council and the Commission also adopted a joint declaration agreeing that "any future use of the EFSM Regulation or any other instrument of a similar nature, for the purpose of safeguarding the financial stability of a Member State whose currency is the euro, will be made conditional upon arrangements (via collateral, guarantees or equivalent measures) being in place which ensure that no financial (direct or indirect) liability will be incurred by the Member States which do not participate in the single currency. In order to reflect this principle, the Commission will make a proposal for the appropriate changes to the EFSM Regulation as soon as possible, which shall be agreed in any case before any other proposal for support under the EFSM Regulation is brought forward. Moreover, the Commission commits not bringing forward any proposal for the use of the EFSM without a mechanism for the protection of the Member States whose currency is not the euro being assured."
The EFSM provides financial assistance to EU member states in financial difficulties. It relies on funds raised by the Commission on the financial markets under an implicit EU budget guarantee."
ECB, Greek Banks Take Center Stage
During Thursday's ECB press conference following an uneventful interest rate decision to maintain the status quo, President Mario Draghi mentioned that Greek depositors withdrew some €8.1bn in savings from their accounts. This figure stands at 5.8% of total deposits at Greek banks.
While banks have remain closed for almost 3 weeks and counting, and will remain so through Sunday, capital controls baring savers from withdrawing more than €60 per day have still resulted in a daily exodus of money the likes of €100mn.
At this rate, Greek banks will never be able to reopen as any inkling of doing so would see a bank run large enough to topple Greece's entire financial system.
Fortunately for Greece, the ECB came to the rescue yesterday when it relented on it tough stance by raising the ELA (Emergency Liquidity Assistance) to the Greek central bank by €900mn. This new limit will be valid until next week when the Governing Council will again convene to discuss further allowances.
The ECB said in its statement released Wednesday that the basis for further increasing liquidity assistance to Greece has been established, referring to the successful parliamentary rectification by Greece on the latest bailout deal agreed to on Monday.
That has somewhat eased the pressure on the Greek government to end its 3-week bank holiday and capital controls, something its citizens have never experienced since the Second World War.
As a result, Greek banks will be able to roll up their rusty shutters come Monday's when we suspect there would be a real need for crowd control measures, and maybe even riot police to douse any possible violence. Capital controls will however remain at €60 of withdrawals per day.
€900mn is simply not enough to replenish even an iota of capital that has left the banking system. Recall that we mentioned something along the lines of a €25bn liquidity injection to recapitalize insolvent Greek banks; this was part of the preliminary bailout agreement between the Troika and Greece.
Greece's banking sector is now under intense scrutiny by its creditors and several other watchdogs.
More from Reuters:
"Banks have been closed since June 29 after Athens imposed capital controls. "They will open on Monday," the banker said.
The ECB on Thursday increased the cap on emergency funding Greek lenders can draw from the domestic central bank by 900 million euros.
A ministerial decision on the bank holiday is expected to be released later on Thursday.
A government-appointed commission responsible for vetting capital outflows since controls were imposed said it had approved applications worth 819.9 million euros until July 13."
There is one more immediate issue that Greece has to overcome before Monday. €3.5bn in ECB obligations will come due on 20 July. There is now a hurried impetus to secure a bridge loan to transfer €7bn in emergency funds to the country's coffers so it can deliver on the ECB's repayment.
We spoke about this arrangement in the section underneath this. While no additional information has been officially released by the Eurogroup, it is true that the bridge loan will come through without issue.
Tsipras' Syriza Majority No More, Bridge Loan Readied
Overnight the Greek parliament voted in a landslide favor passing a controversial bill which would implement key austerity and reform measures under Greece's third bailout program drafted Monday.
Of the 300 members of parliament, 229 voted in favor of the bill while 64 members voted against. There 6 who abstained were all from the radical-left party Syriza. This means that Brussles will be able to start earnest negotiations and build from the latest bailout proposal and fine tune details.
So far, financial markets all across the world have been taking this news positively. We aren't. To understand our concerns, please read the section immediately before this. It is when talks behind, will we see the internal fiction between the various factions of the Troika.
More from Bloomberg:
"A majority of 229 Greek lawmakers voted in favor of bill which includes prior actions demanded by creditors for a bailout agreement that the govt has applied for, Parliament Speaker says.
64 lawmakers voted against bill, 6 abstained, in Greece’s 300-seat chamber
Bill titled “urgent measures for the negotiation and signing of an agreement with the European Stability Mechanism”
38 lawmakers of governing Syriza party, including former finance minister Yanis Varoufakis, former deputy Finance Minister Nadia Valavani, and Energy Minister Panagiotis Lafazanis didn’t support bill.
Out of 149 Syriza MPs, 32 voted against bill, 6 abstained, 1 didn’t show up."
The most important take away from yesterday's victory for Europe is not the commencement of serious talks between both parties, but the fissuring of Syriza. Telling is the fact that Yanis Varoufakis, ex. Greek FM and previous close aide of the PM, voted against the bill.
38 members of Syriza did not support the bill, causing Tsipras to loose his majority in parliament. The consequences of this are manyfold, and is not going to be a smooth nor pretty process.
One, there will be a shakeup of the entire Greek parliament if Tsipras is not able to 'convert' his unbelievers. Two, a cabinet reshuffle would almost certainly require a snap election which would come at an inappropriate time. Three, Tsipras will most probably have step down either voluntarily or forcefully.
Interesting to be noted, Tsipras remains Greece's most popular politician in the last 5 years, despite his short term in office and brazen nature. The Prime Minister has himself said that he wished to serve his full term, but we suspect it isn't a a matter of choice as time passes.
The Eurogroup's official statement after Greek lawmakers passed the bill:
"The Eurogroup welcomes the adoption by the Greek Parliament of all the commitments specified in the Euro Summit statement of 12 July. On the basis of a positive assessment by the institutions, which concluded that the authorities have implemented the first set of four measures in a timely and overall satisfactory manner and which confirmed that the Euro Summit statement has been included in the preamble to the implementing law adopted by the Greek parliament, we reached today a decision to grant in principle a 3-year ESM stability support to Greece, subject to the completion of relevant national procedures.
Upon the completion of the relevant national procedures and the formal decision by the ESM Board of Governors expected by the end of this week, the institutions would be entrusted with the task of swiftly negotiating a Memorandum of Understanding (MoU) detailing the policy conditionality attached to the financial assistance facility.
The Eurogroup calls on the Greek authorities to swiftly adopt the second set of measures by 22 July as foreseen in the Euro Summit statement, and update the legislation related to the first set of measures consistent with the recommendations made by the institutions in their compliance report."
Tuesday evening also saw a roughly 13,000-strong mob of angry Greeks protesting violently outside the Greek parliament building as the voting went on. Riot police using tear gas and water cannons were engaged. Is this the first signs a civil uprising against a coup d'état by European technocrats?
So what happens immediately afterward? Before even starting discussions on the ESM bailout program, a bridge financing loan will be to be arranged for Greece to repay some €3.5bn to the ECB due Monday. Said loan is rumored (by informed officials) to be from the now sterile EFSM (the precursor to the current ESM).
The EFSM has some €9bn to €12.5bn in untapped funds of which €7bn should be siphoned to create a 3-month loan to Greece. The minutiae of the loan will be announced shortly after the European Parliament votes on the loan, which might commence as soon as Wednesday or early Thursday.
All this looks and feels like positive developments. As pragmatists, we must say that nothing has been solved and Europeans are doing what they have been doing so excellently for the last half a decade - kicking the can down the road. What happens if we run out of road? Well, pave more road then!
The IMF Has Had Enough, Threatens To Withdraw
As the second largest single entity supporting Greece's ailing economy and financial system, the IMF can throw heavy punches when it comes to negotiating Greek bailout programs.
Europe just took a heavy uppercut to its chin when the IMF officially announced that if its requirements are not met, it will pull out of the current bailout talks, completely. To do so at this critical juncture risks rupturing days of intensive negotiations with culminated with Monday's deal.
More than 10 days ago, we covered the myth that the IMF had anticipated and was prepared for an eventuality which entails a significant write down in Greek debt. Today, this myth has become an entirely real story as the supranational institution has vocally called for a sizable debt relief program to be implemented in parallel to the new bailout program Greece has agreed to on Monday.
Wednesday sees the verdict Greek lawmakers will champion, whether they pass or reject the new bailout measures stipulated in the latest €86bm ESM loan package. In Part II of this never ending sequel, readers were briefed on the plausible sticking points that threaten to derail an otherwise uneventful event horizon.
Greece became the first developed nation and the first country in the Eurozone to default to the IMF when it failed to make a €1.56bn payment 2 weeks ago. This happened after it failed accept the Eurogroup's proposal for its third consecutive rescue funding program. Rather than labeling it as a default, the IMF simply placed Greece on arrears.
Although the IMF is not directly involved in the latest bailout package advanced to Greece, it does have a major say in how such programs are structured. As one of the creditors which make up the Troika, the IMF is able to rectify the terms of such programs, making it a force not to be reckoned with.
Late Tuesday evening, the IMF threatened to pull out of all existing and future bailout programs when its calls for debt relief went unheard. In a study published by the IMF, Greece's debt sustainability will be further weakened if it takes on some €86bn in loans from Europe.
More from the Financial Times:
"The International Monetary Fund has sent its strongest signal that it may walk away from Greece’s new bailout programme, arguing in a confidential analysis that the country’s debt is skyrocketing and budget surplus targets set by Athens cannot be achieved.
"Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far," the memo reads. Under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.
IMF involvement in Greece’s rescue has been critical to a German-led group of eurozone hardliners who believe the European Commission, one of the other Greek bailout monitors, is not sufficiently rigorous in its evaluations.
The issue became one of the major sticking points during all-night negotiations between Alexis Tsipras, the Greek prime minister, and Angela Merkel, his German counterpart, at the weekend, with Mr Tsipras repeatedly refusing to accept IMF participation in a new bailout.
According to EU officials, Ms Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore "Grexit" from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that "Greece will request continued IMF support" once its current IMF programme expires.
If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF’s imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.
In addition, an EU official said that of the €86bn in Greek financing requirements, the European Stability Mechanism — the eurozone’s €500bn bailout fund — was expected to put up only €40bn-€50bn.
The current IMF programme, which still has €16.4bn in undisbursed funds and runs through March 2016, is expected to make up some of the difference, and eurozone officials had been assuming a follow-on IMF programme would contribute as well.
Any shortfall would have to be made up through Greek privatisation proceeds, which have repeatedly fallen short of expectations, or through Greek borrowing on the bond market, which has dried up since the Syriza-led government took power in Athens in January — and which the IMF memo said was highly unlikely to materialise.
“Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective,” the IMF wrote."
The documents also shows the IMF forecasting Greek debt-to-GDP climbing to 200% from the current 170% in the next 2 years, before settling back at 170% past 2017.
The basis for withdrawing aid, according to the IMF's own explanations, include the risks of further defaults because "Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far." This is a stance the IMF has held since 2014 when the first crack in the country's political front began to surface.
Greece has lost access to primary funding markets, relying almost entirely on public institutional and bailout monies to keep itself afloat. The IMF has "bent its rules" for the previous 2 bailout programs and it might be willing to throw in the towel after eschewing some of its most fundamental principals.
What is however preventing the IMF's voice from behind heard in the European Parliament is Germany's ardent antagonism towards any form of debt relief. German Chancellor Angela Merkel herself opposed to even the most tactile notions of debt forgiveness, either by subjecting Greek bond holders to haircuts or reducing the amounts outstanding at the Troika.
Last week, Germany made it clear the the IMF's involvement in all Greek bailout programs was mandatory. It was also Germany that demanded Greece channel all privatization proceeds to a special €50bn escrow fund, originally intended to be domiciled in Luxembourg but now across the Eurozone.
As we see it, this will be the greatest sticking point for this week, least to say the world is keeping their fingers crossed that an increasingly polarized Greek parliament votes to implement draconian austerity measures 61% of Greeks opposed to.
If the IMF must stay, and it demands some kind of debt relief arrangement (to the tune of 30%), but Germany (and probably other conservatives) oppose to it, then it is not a question of if there will be a conflict but how said conflict will be resolved without blowing up the entire continent.
At the end of Wednesday, Europe will know the verdict of the Greek parliament. Even if Tsipras' government enacts the new measures into legislation, it may all be moot if the IMF delivers on its meanest threat yet. We shall see.
Key points from the IMF's latest Greek DSA report:
"The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM. There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates close to the current AAA rates before debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.
Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.
Significant shortfalls in program implementation during the last year led to a significant increase in the financing need—by more than Euro 60 billion—estimated only a few weeks ago. As a result, debt-to-GDP by 2022 was projected to increase from an estimate less than a year ago of about 105 percent to a revised estimate of 142 percent, significantly above the target of 110 percent of GDP. This would under the November 2012 agreement have implied significant additional measures to reduce the face-value of debt.
Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective.
The events of the past two weeks—the closure of banks and imposition of capital controls—are extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to what was projected in our recently published DSA. A full and comprehensive revision of this debt sustainability analysis can only be done at a later stage, taking into account the deterioration in the economic situation as a result of the closing of the banking system and the details of policies yet to be agreed.However, it is already clear at this stage that there will be a significant increase in the financing need. The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion. Adjusting our recent DSA mechanically for these changes, and taking into account the agreed weaker growth path for the next two years, gives rise to the following main revisions:
- Debt would peak at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt—at 177 percent of GDP in 2014—is already behind us.
- By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in our published DSA.
- Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term.
- Medium-term primary surplus target: Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so. The reversal of key public sector reforms already in place— notably pension and civil service reforms—without yet any specification of alternative reforms raises concerns about Greece’s ability to reach this target. Moreover, the failure to resist political pressures to ease the target that became evident as soon as the primary balance swung into surplus also raise doubts about the assumption that such targets can be sustained for prolonged periods. The Government and its European partners need to address these concerns in the coming months.
- Growth: Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area, which will require very ambitious and steadfast reforms. For this to happen, the Government— which has put on hold key structural reforms—would need to specify strong and credible alternatives in the context of the forthcoming program discussions.
- Bank support: The proposed additional injection of large-scale support for the banking system would be the third such publicly funded rescue in the last 5 years. Further capital injections could be needed in the future, absent a radical solution to the governance issues that are at the root of the problems of the Greek banking system. There are at this stage no concrete plans in this regard."
More updates as they come...
Compliation Of Headline Bulletins
In no chronological order:
- IMF CONFIRMS GREECE REPAID THE TOTALITY OF ITS ARREARS TO THE IMF, EQUIVALENT TO SDR 1.6 BILLION
- NATIONAL BANK OF GREECE: BANK HOLIDAY EXTENDED TO JULY 19
- Greek Finance Ministry says banks will not re-open on Monday, local reports
- DRAGHI SAYS GREEK DEBT RELIEF IS NECESSARY
- DRAGHI: UNCONTROVERSIAL THAT GREEK DEBT RELIEF IS NECESSARY
- DRAGHI SAYS ECB RAISED GREEK EMERGENCY BANK AID THURSDAY
- DRAGHI SAYS CONDITIONS TO INCREASE ELA HAVE BEEN RESTORED
- DRAGHI SAYS ECB ACTS ON ASSUMPTION THAT GREECE IS EURO MEMBER
- DRAGHI SAYS ELA INCREASE WILL BE €900 MILLION OVER ONE WEEK
- FINNISH PARLIAMENT GRAND COMMITTEE APPROVES GREEK BAILOUT TALKS
- GREEK GOVERNMENT HAS VOTES TO APPROVE BAILOUT BILL, TALLY SHOWS
- GREECE'S ENERGY MINISTER LAFAZANIS SAYS HE SUPPORTS GOVERNMENT
- LAFAZANIS SAYS `WE 'RE THE HEART AND SOUL OF SYRIZA'
- LAFAZANIS SAYS HE DOESN'T WANT SNAP ELECTIONS
- Greece: 107 out of 201 members of Syriza’s central committee call for No and a party conference
- GREEK PM TSIPRAS SAYS LENDERS GIVE A MESSAGE THAT IN COUNTRIES UNDER A BAILOUT THERE IS NO POINT IN HOLDING ELECTIONS
- I SIGNED I DEAL I DO NOT BELIEVE IN BUT I'M WILLING TO IMPLEMENT AND WILL ASSUME RESPONSIBILITIES
- GREEK PM TSIPRAS SAYS I SIGNED I DEAL I DO NOT BELIEVE IN BUT I'M WILLING TO IMPLEMENT AND WILL ASSUME RESPONSIBILITIES
- GREEK PM TSIPRAS SAYS LENDERS GIVE A MESSAGE THAT IN COUNTRIES UNDER A BAILOUT THERE IS NO POINT IN HOLDING ELECTIONS