What an extraordinary weekend that was! The ball was batted from one side of the net to the other even more often than managed by Federer and Djorkovic although the latter two managed a lot more class and style. Late on Saturday it was leaked that a sizeable minority of Euro area countries were against more bailouts for Greece and that Germany’s Finance Minister Herr Schauble had suggested a 5 year “temporary” exit for Greece from the Euro. This morning we wake up to discover that there is a deal but that even the abasement and some may consider the debasement offered last week by Greek Prime Minister Tsipras was not enough. Indeed he and his advisers must be mulling the last five months as all that has happened on his watch is that Greece’s position has gone backwards in very respect. As well as wondering how they can explain this to the Greek people who only a week ago voted against a more favourable deal.
The Greek banking system
This has turned out to be the keystone for the whole episode. The way that deposits have left and then flooded out of the Greek banking system left the Greek government with what turned out to be an insoluble problem. Whilst the implementation of capital controls slowed the flow to an estimated 100 million Euros a day the catch was that this was on top of the amounts which had already departed meaning that the Greek banks were engulfed by the jaws of quite a cash crunch. As the gears of the Greek banking system crunched the Greek economy was dragged downwards too as stories emerged of barter and other currencies (Bulgarian Lev) being used.
A proper “Lender of Last Resort” would never have allowed this and UK readers in particular will recall Bank of England Governor Mervyn King promising that the ATMs would not be allowed to go empty in the Northern Rock crisis. The problem for Greece is that is national central bank handed over such powers to the international ECB. It operated a different system where it first offered as little liquidity as it felt it could get away with to the Greek banking system and then finally froze it at 89 billion Euros. Not for the first time in the Euro area crisis it became not only politicised but also a weapon promulgating bullying and intimidation.
After what happened above the ECB will take centre stage later today when it decides what to do about its ELA (Emergency Liquidity Assistance) programme for Greek banks. If it really wants to stamp its boot on Greek banking it will freeze it at current levels. Should it wish to offer something of an olive branch the ultimate insider Robert Peston has leaked that an additional 2 billion Euros of ELA will allow Greek banks to open tomorrow.
The new agreement has been published and in it is something rather odd.
The ECB/SSM will conduct a comprehensive assessment after the summer
I rather suspect that the Greek banks cannot wait until then don’t you? On such a time scale Greeks can expect capital controls to be reduced but not eliminated for some time yet.
Of Privatisations and Asset-Stripping
This has been one of the most contentious issues. On one side the Euro area establishment has felt with some reason that the Greeks have not pushed this forwards with the necessary vigour. On the other side the Greeks have grounds to feel that this is a type of asset-stripping when for obvious reasons asset prices and values are low. Thus the progress so far on this front has been very small which contrasts considerably with the grand designs below.
valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means.
This is potentially like adding nitro-glycerine to the mix as we consider what may take place here and the detail is even more troubling.
The monetization of the assets will be one source to make the scheduled repayment of the new loan of ESM and generate over the life of the new loan a targeted total of EUR 50bn of which EUR 25bn will be used for the repayment of recapitalization of banks and other assets and 50 % of every remaining euro (i.e. 50% of EUR 25bn) will be used for decreasing the debt to GDP ratio and the remaining 50 % will be used for investments.
This is all rather extraordinary and as ever there are questions about not only the process but also the arithmetic used. If we look at the Greek banks they have received some 45 billion Euros of restructuring so far. Thus if we add another 20 billion or so we get to around 65 billion Euros. More than the 50 billion of Greek assets used here! What if the Greek banks are still not worth much when they are sold on?
Also I do hope that the French banks are not allowed to repurchase the Greek bank subsidiaries they have sold, other wise they will be completely round-tripping both the Euro area and Greek taxpayers for quite a potential profit.
This is likely to turn-out to be the most contentious issue of all.
The debt just keeps increasing
It was only on Friday I was analysing a Greek proposal which suggested an extra 53.5 billion of bailout money or debt. Over the weekend this has expanded quite substantially.
The Euro Summit takes note of the possible programme financing needs of between EUR 82 and 86bn, as assessed by the Institutions.
So another 30 billion Euros in a single weekend. Care should be taken in simply adding this to Greece’s existing debt as some of this will be a refinancing of the existing debt as highlighted below.
The Euro Summit takes note of the urgent financing needs of Greece which underline the need for very swift progress in reaching a decision on a new MoU: these are estimated to amount to EUR 7bn by 20 July and an additional EUR 5bn by mid August.
These involve purchasing a Greek bond maturity off the ECB next Monday which will be debt monetisation in all but name and repayments including arrears to the International Monetary Fund (IMF). However there will be a substantial amount of new borrowing and if we also factor in a shrinking economy the debt to GDP ratio which if you recall we were promised in 2010 and again in 2012 was “on track” to fall to 120% will instead push over 200%.
What about debt restructuring?
As we consider a debt burden that will be going “Higher and Higher” as Jackie Wilson put it even the Euro area establishment have figured out that something (again) needs to be done. Except the quote about points out that the ECB is going to be repaid in full next Monday which is not exactly an auspicious start!
There are serious concerns regarding the sustainability of Greek debt.
What is left? More of the same and the emphasis is mine.
the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level.
My original suggestion that the Greek debt would be to infinity and beyond is well on its way to coming true or to be more specific it to be reclassified as a zero coupon perpetual bond.
It is symbolic that President Hollande of France has described this as a “courageous choice” by Prime Minister Tsipras. Viewers of the television series Yes Minister will realise that this is the worst epithet the apocryphal civil servant Sir Humphrey Appleby could muster. He finds himself having to go to the Greek Parliament with a long list of economic reforms some of which have to be voted in favour of by Wednesday. Even worse some of them require a u-turn on the legislation that this government has passed. Then we get to the increase in austerity of which there are few precise details right now but we know are coming. The Syriza election campaign was based on a no to more austerity which was reinforced by the Oxi result of just over a week ago.
We are left reviewing ever more debt, an ongoing recession and potential asset-stripping. Let us hope that the saying “it is darkest before the dawn” comes true.