Today has already seen a flurry of news from Greece and in addition to the re-opening of the banks there has been quite a bit of borrowing and repayment activity. It would appear that the Greek government was either under instruction to settle its debts promptly or decided to do so of its own accord. Thus some 6.8 billion Euros of debt has been repaid according to Bloomberg. If we look at the list we see what might be called a likely crew. The main payment was just over 4 billion Euros to the European Central Bank (ECB) followed by the settling of 2 billion Euros to the International Monetary Fund (IMF) and the rest to the Bank of Greece.
The reasons for this were that as part of its Securities Markets Programme the ECB had been buying Greek debt to support the price and reduce the yield. Some of that can was kicked forwards to today as the bond has matured and the capital needed to be repaid as well a coupon or interest payment. This will be a reasonably frequent event as the ECB initially chose to buy short-dated bonds because the “shock and awe” bailout operations were predicted to work quickly. It is hard to know whether to laugh or cry at that. Also various IMF repayments which have been missed have been settled as well as the account at the Bank of Greece which was raided to make an IMF repayment.
The obvious problem with the paragraphs above is that Greece lacked the money to make such payments as in the case of the IMF it would have already done so. Step forwards the EFSM or European Financial Stability Mechanism! It has loaned some 7 billion Euros to Greece and of that there is now only a relative pittance left.
You may wonder why the grandly named European Stability Mechanism was not used for this purpose? After all it is the “the permanent crisis resolution mechanism for the countries of the euro area.” However as you can see from the quote below it has what is financial terms might be compared to the turning-circle of a super-tanker.
The institutions will start negotiating the Memorandum of Understanding (MoU) with the Greek authorities.
Once done it can lend but not before which as I have pointed out before is a clear flaw for an organisation to provide stability. Thus the nine nations of the European Union (including the UK) found themselves providing bridge financing to a Euro area problem. Still at least the EFSM has a quality song written by Paul Simon.
When times get rough
And friends just can’t be found,
Like a bridge over troubled water
I will lay me down.
Like a bridge over troubled water
I will lay me down.
What about QE for Greece?
We open with one rule of ECB club, which is that the ECB must always be repaid in full and on time! That has been fulfilled this morning although quite how it can walk away with a profit from this is beyond me in terms of moral behaviour. Because of the distressed state of the Greek bond market back then it would have paid much less than 100. Also Euro area taxpayers and for a time European Union taxpayers are financing its profits in an example of round-tripping.
However if we go back to last Thursday ECB President Mario Draghi dropped various hints that Greece may not be the one Euro area country where his Quantitative Easing bond buying programme is not taking place for too long.
So there is an issue of going back to a rating which would make Greek bonds, eligible for monetary policy.
Constâncio: Or there should be a waiver.
So Vice President Constancio’s slumber was disturbed to remind us that the claim that the ECB is a “rules-based organisation” is one only for when it feels like that.. It can ignore them if it likes. This then went on.
Second point is the limit on how much of each country’s bonds can be bought by the ECB. As some SMP holdings will be repaid on 20 July and afterwards Greece would comply with this limit and there would be some room for doing QE.
You can see that some 3.5 billion Euros of this was cleared only this morning and there is more to come on August 20th when another bond owned by the ECB (3.2 billion Euros) reaches its maturity date.
Indeed Vitor Constancio went further and the emphasis is mine.
So the Governing Council will have to assess, after there is a programme, at a certain moment, that there is a credible compliance with the programme. That may come at the end of the first review, because that would be clear. The Governing Council could nevertheless decide even before that if there was credible implementation. So it’s at the discretion of the Governing Council either to wait for the review or to do it slightly before, if indeed, there is good implementation of the programme.
As the institutions who used to be called the troika before that name became poisonous have if you will excuse me a track record of telling us that Greece is “on track” what do you think is likely to happen next?
If Greece plays ball and the ESM gets on with its review and program then not only will its funding become available but Greece will then probably see itself in the ECB QE programme. Just to give an idea of scale this would have meant that some 1.36 billion Euros worth of Greek government bonds would have been bought in June alone.
What about Greece?
In a financing sense this is a story of two halves. In a capital sense the issue will build as Greece will have to keep borrowing more. Today is a small example of this as interest payments are capitalised and rolled on. However there will be gains in terms of interest to be paid as for example the maturing bond will be financed at a much lower interest-rate should the ESM finally get around to completing its review.
Of course this is yet another version of can-kicking.
What about the Greek banks?
They are open today unlike the Athens stock exchange which remains closed. There has been a slight relaxation of the deposit withdrawal controls as now 420 Euros can be withdrawn a week as opposed to having to make 7 daily withdrawals of 60 Euros. If we do the maths we see that the extra ECB ELA financing of 900 million Euros will finance some 2,142,857 such withdrawals this week.
If we look beneath this though the banking system in terms of lending to businesses must be in a dreadful state. What price credit finance? Or is there any credit finance at all?
The VAT rise
This is another kick in the teeth for businesses. The fall in the value of the Euro was something which hopefully would give a boost to the Greek tourism business. However as we arrive at peak season prices have been pushed higher via the VAT (sales tax) increases. The rate for restaurants and taxis has risen sharply from 13% to 23%.
If we move to the domestic market there are a range of increases including a similar jump as stated above on some foods. This has been estimated by Macropolis as having an average effect of some 650 Euros per household. As net household income is of the order of 13,800 Euros (OECD 2014) we see that this will take quite a bite out of it.
Frankly this seems set to prove that the Laffer Curve can apply to indirect as well as direct taxes.
This rather speaks for itself as an indicator of what has been happening in the Greek economy.
The Turnover Index in Industry (both domestic and non-domestic market) in May 2015 compared with May 2014 recorded a decline of 4.2%……Manufacturing turnover decreased by 4.2%.
Not what you want when you have a large debt burden.
We are back to a story of two halves here and it is a regular theme of the gap between the financial and real economy. There is a nuance however as this time it is a central bank rather than a private-sector one disappearing over the horizon with a swag bag of cash. There is a dizzying round-tripping of funds but the debt is being shifted onto Euro area taxpayers and for a hopefully brief period European Union ones as well as the Greeks themselves.
As the debt burden rises the average cost per unit will fall. This will help the Greek government finances at the margin but by the time we reach the Greek economy we see two major forces in the opposite direction. The first is the ongoing credit crunch where there is no finance available. The second is the latest round of austerity and in particular the VAT rises which will crunch the economy one more time. Does anybody believe that QE will be a cure for this?