Archive for June, 2015

Greece threatens to sue

June 30, 2015

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And so now we come down to the wire for Greece.

The question now is whether it would be a default if Greece misses its $1.7 billion payment to the International Monetary Fund today and is forced to exit the Eurozone.

Greece is fighting hard to stay right in there with the Daily Telegraph in London reporting that the debt-stricken nation could sue to stay in the Eurozone if it fails to reach a debt deal.

“The Greek government will make use of all our legal rights,” Greek Finance Minister Yanis Varoufakis told the newspaper. “We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for (a) euro exit and we refuse to accept it. Our membership is not negotiable.”

And the most important player in all of this, the European Central Bank, is keeping shtum. According to Bloomberg, it’s declined to comment on what position it will take if Greece fails to meet the payment, something everyone expects.

The three major credit-rating companies say failure to pay the Washington-based IMF wouldn’t constitute a default because that term is reserved for private-sector creditors, and the IMF is no private sector creditor.

The big issue is the solvency of the Greek banks and the European Central Bank has been keeping the Greek banking system alive with almost 89 billion euros of Emergency Liquidity Assistance.

Let’s not forget that European Central Bank chief Mario Draghi famously vowed in 2012 to “do whatever it takes” to save the euro. So it’s not over yet.

Tsipras calls referendum on EU bailout

June 27, 2015

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Greek Prime Minister Alexis Tsipras has gone for the nuclear option and has called for referendum on Sunday week to decide on the bailout terms.

Tsipras announced the referendum in a televised speech to the nation after another day of fractious negotiations with creditors closed without a deal. The dramatic display of one upmanship and ultra-negotiation comes after Athens rejected a proposal from the troika aimed at delivering some €16 billion ($A23.3 billion) in aid to Greece as part of an extension of the country’s second bailout program.

Tsipras said the creditors’ demands for more labor market reform, cuts to pensions and public sector wages, and increases in taxes on food, restaurants and tourism amounted to an attempt to humiliate “the entire Greek people.”

“These proposals mainly highlight the insistence of the IMF on harsh and punitive austerity,” Tsipras said on Greek TV.

Greeks are queuing at the banks now. The Wall Street Journal reminds us that it isn’t certain whether Greece’s banks will be able to stay open until the referendum has been held, nor whether Greece will have to impose capital controls—up to and including bank holidays—to cope with deposit withdrawals. Much depends on the willingness of the European Central Bank to offer emergency liquidity to Greek banks to cover potentially heavy deposit withdrawals.

Is this a last minute attempt to put pressure on EU finance ministers? Who knows. But one thing is clear: Tsipras is playing a dangerous game with the European Central Bank ahead of a difficult week that could very well see the imposition of capital controls.

Zero Hedge says the situation is looking grim “At this point there is no turning back, and the Greeks – of which 80% want to stay in the Euro even as 80% want an end to austerity – will get to choose their own fate. Whatever choice they make, they will only have themselves to blame.”

If Greece votes no, then a Grexit is inevitable. If it votes yes, then Tsipras will probably resign. Either way, Greece will suffer.

Greece missing the IMF payment next week won’t be a default

June 26, 2015

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If Athens does not meet next Tuesday’s payment of the debt it owes the International Monetary Fund, it won’t technically be a default. It will just be in arrears, which leaves room for further tortuous negotiation. Which leaves it on the European Central Bank drip.

Greek officials have said they can’t pay the fund without a deal, needing additional emergency financing from its creditors to cover upcoming bills to the IMF, the European Central Bank and even its own domestic institutions.

But according to Reuters, most top credit rating agencies say they would not cut Greece’s  rating to default if it misses a payment to the International Monetary Fund or European Central Bank. Standard and Poor’s, Fitch and DBRS, three of the top four, say that as the IMF and ECB are not standard creditors, a missed payment to either, would not be classed as a default. All it would do would be to push Greece’s credit rating into junk. “If Greece were, for whatever reason, not to make a payment to the IMF or ECB that would not constitute a default under our criteria as it is ‘official’ sector debt,” said Frank Gill, who rates Greece for S&P.

The Wall Street Journal says that if Greece missed the payment, IMF Managing Director Christine Lagardewould notify the fund’s executive board. But the IMF’s official arrears policy allows the managing director to take a month before reporting the arrears to the board, which means more time for negotiation.

Bloomberg says that non-payment would land Greece in a club of countries in arrears that currently includes Zimbabwe, Sudan and Somalia. The three nations have combined overdue payments of about $1.8 billion.

And once in arrears, Greece may have little incentive to pay back the fund. More to the point, the real loser could be the IMF. As Benn Steil, director of international economics at the Council on Foreign Relations in New York says in a blog post non-payment by a European state will surely undermine the IMF’s credibility in the eyes of developing countries, and likely accelerate efforts to build alternative institutions.
What will it do when it’s Ukraine’s turn?

Scotland won’t be giving the Queen any more money

June 25, 2015

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So it looks like Scotland is refusing to send Queen Elisabeth any more money.

As reported here, Buckingham Palace is concerned that the Scottish National Party-led government will pull out of an agreement to fund the monarchy. As part of the devolution agreement, Scotland will take control of £216m of Crown Estate property north of the border in April 2016. A refusal to make a contribution to the sovereign grant would be the equivalent of a £2.2m-a-year funding cut for the monarchy.

The Guardian reports that the Scottish parliament wants to retain the profits from the crown estate in Scotland for use in Scotland. The result: a reduction in the sovereign grant, which funds the monarchy.

Not that it’s going to put the Queen in the poor house. According to The Guardian, her commercial property empire, which dates back to the Norman conquest of 1066, has nearly doubled in value over the last decade and is now worth £11.5  billion.

Greece is the word

June 24, 2015

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Greek  Prime Minister Alexis Tsipras has flown out to Brussels to  salvage a bailout deal with creditors.

According to the Financial Times,  there are sharp divisions between the International Monetary Fund and the European Commission with the IMF pushing for benefit cuts right across the system.

In addition, talks have continued to founder over the issue of debt relief, which Greek authorities have insisted is necessary to sell a deal at home. Although the IMF has backed a restructuring of Greece’s eurozone bailout loans, a Berlin-led group of countries have insisted debt relief cannot be addressed until after the current talks are completed.

The big worry is that there will not be enough time for national parliaments to approve an extension of Greece’s current programme before it expires on Tuesday. Without an extension, the remaining €3.6bn in the EU’s portion of the bailout would disappear and Athens would likely default on a €1.5bn loan repayment due to the IMF.

Which is why  the head of the Eurogroup reportedly told Europe’s leaders to get Greece’s bailout sorted by today, “even if it takes all night.”

The Wall Street Journal reports that  divisions remain between Greece and its international creditors over measures Athens must implement before receiving desperately needed bailout aid. According to a key 5 -page document seen by the paper, there are laws Greece must pass through parliament before the country can get any aid disbursement.

Lots of points of disagreement between Greece and is creditors. Like for example corporate taxation, the overhaul of Greece’s pension system and value-added taxes.

Meanwhile the clock is ticking.

Why the Greek banks are Athens Achilles heel

June 20, 2015

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The Greek banks are Athens’ Achilles hell. With talks to save Greece going nowhere, people have been pulling money out of Greek banks at a rate of knots. According to Reuters, savers have pulled out billions of Euros in recent days, more than double the amount that the European Central Bank granted Greek banks in extra emergency liquidity assistance (ELA) for the entire week. Why are they doing it? They’re scared that their bank accounts could be frozen if Greece crashes out of the euro.

The Guardian reports that people travelling to Greece for a holiday are being advised to take plenty of cash with them amid fears the country’s ATMs could be shut down on Monday if a resolution to the crisis is not found.

According to the Financial Times, the Greek banks are vulnerable on three fronts.

First, is a liquidity shortage which is worsening as consumers and companies take their cash elsewhere fearing a forced conversion of their savings into a new, less valuable currency. Secondly, there are growing doubts about the quality of their assets, particularly Greek government bonds, which stand to be severely damaged in the event of a government default. And finally, Greek banks are suffering from a progressive worsening of the economy, which has slipped back into recession in the first quarter of this year after a tentative recovery in 2014.

That means one thing: even if there is an eleventh hour deal, it won’t save Greek banks.

Greece: the final countdown

June 15, 2015

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So the prospect of a Grexit, Greece leaving the Euro, is looking increasingly likely following the collapse of last-minute talks with creditors over the weekend.

The Financial Times reports that Greek negotiators, including Nikos Pappas, aide-de-camp to Prime Minister Alexis Tsipras, left the European Commission only 45 minutes after entering.

The next step is a meeting of Eurozone finance ministers on Thursday. That’s the  last chance for Athens to secure agreement on a list of economic reforms its creditors are demanding in order to release the €7.2bn before Greece’s EU bailout runs out at the end of the month.

But as Peter Spiegel and Kerin Hope at the FT point out, the endorsement of Greece’s trio of bailout monitors — the commission, the International Monetary Fund and the European Central Bank — the chances of an amicable agreement on Thursday are remote.

The only thing Eurozone negotiators can do after that is resort to the “take it or leave it” strategy used on Cyprus at a Eurogroup meeting two years ago.

Greece is demanding more time to pay and it wants some of its debt written off.  Its lenders want to see pension reforms, higher VAT and a promise to target a primary budget surplus.

Bloomberg reports that Greek Finance Minister Yanis Varoufakis said in an interview with Bild newspaper published Monday that Greece would only be able to pay back its debt if creditors accept a restructuring to reduce the amount owed. He said an agreement could be reached “in one night” if German Chancellor Angela Merkel took part in the talks.

The big question is whether Merkel has miscalculated by playing hard ball with Athens.

As Matthew Karnitschnig points out in Politico many economists say the troika’s strategy of forcing Athens to make further spending cuts, just as the country was emerging from a depression, was the wrong medicine. The limbo Greece has faced under Syriza has only made the situation worse. Merkel bungled it.

The only solution seems to be giving Greece some debt relief, and letting it make a real contribution to the process.

Keeping Greece in the Eurozone is about more than money

June 13, 2015

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Why is the IMF and the Eurozone negotiating with Greece to keep them in the EU? Why are they prepared to put up with Greece’s finances? It’s all because of Greece’s strategic importance to Europe and the US.

As Maria Petrakis writes for Bloomberg, Greece’s trump card historically has been its location at NATO’s southeastern flank. As Islamic State gains to the south and east, Russia encroaches to the north and migrants flood to Europe, the question is whether Greece is worth more than the billions it needs to get out of its financial hole.

Writing in the Financial Times, Marc Chandler makes the point that the issues about Greece’s debt, important though they are, should not blind politicians to Greece’s outsize geopolitical significance.

“This is a country that bridges north and south, and east and west, like no other. It forms Nato’s southern tip,’’ Chandler writes. “And the relationships it enjoys with Russia, Iran, China and others are unique within the alliance. Even if keeping Athens securely inside the European political and security order were to come at a high price, it is one that is likely to be worth paying.

“Greece is responsible for securing a large and volatile part of the EU’s external border. This role is only likely to become more important, given the conflicts unfolding in north Africa and the Middle East.

“The country’s strategic importance as a gateway to Europe has grown — even as its economy has shrunk by a quarter. It is one of the few eurozone countries that meet their Nato commitment for military spending (because of which, incidentally, it ranks among the most important customers of German and French weapons makers).

“Politicians elsewhere in Europe are understandably concerned that their taxpayers will be made to pay for Greece’s past fiscal profligacy. But they should also remember that the country’s valuable contribution to the common defence of Europe goes largely uncompensated.”

Extension offer for Greece

June 9, 2015

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So Greece’s creditors are insisting that Greece gives in on the key sticking points in negotiations:  pension and labourr market “reform. It’s hard to know what to make of how the creditors are handling this given that Greek Prime Minister Alexis Tsipras has told them in no uncertain terms that these are the red lines and he’s not budging.

But now they have put even more pressure on Greece with The Wall Street Journal telling us that they are now talking about extending country’s bailout program through to March 2016. It’s all offered on the condition that Greece makes those painful choices.

The eurozone’s portion of Greece’s €245 billion ($276 billion) rescue program runs out at the end of June, raising questions over how Athens will pay off its debt beyond this month and remain in Europe’s currency union.

The measures are said to have been discussed last week at a meeting of European Commission President, Jean-Claude Juncker, and Greek Prime Minister, Alexis Tsipras. Despite this, talks at the moment remain deadlocked.

What it does mean is that this drama will drag on until next year, and maybe beyond.

Tsipras is playing hard ball. As a he says in this interview, the world can’t afford Greece to leave the Eurozone.

“If Europe’s political leadership is unable to handle a problem like Greece, which represents 2% of its economy, how will the markets react for countries with much bigger problems, such as Spain and Italy with its public debt of €2,000 billion?,’’ he says. “If Greece goes under, the markets will immediately seek out the next one. If negotiations should collapse, the cost to European taxpayers will be huge.”

Why the Greek crisis will continue for the next few years.

June 8, 2015

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Even if it gets a deal up with its creditors, if you think Greece’s problems are going to go away, think again.

At this stage Greece has rejected the EU peace deal with Finance Minister Yanis Varoufakis describing it as “borderline insulting” but the negotiations are continuing.

But as The Economist explains, even if a deal is struck the funds will quickly be swallowed up, not least by those ECB redemptions. Private financing is still not an option which means Greece will be looking at a third bail-out. “Back-of-the-envelope calculations put the sum needed at between €30 billion and €50 billion. Trust between the two sides has evaporated since Syriza’s election, meaning the creditors are likely to demand more onerous terms than they might have done.”

“Any plausible deal at this stage is unlikely to do enough and it’s unlikely to be the end of the matter,” Simon Tilford, deputy director of the Centre for European Reform in London told Bloomberg. “This could just play out again and again.”

Which means this trench warfare will continue for the next two years. Even if Greece muddles through until August, it faces a financing shortfall of at least 25 billion euros through the end of 2016. That’s likely to worsen as the economy slides deeper into recession and tax revenue shrivels.

So who is to blame for this? For sure, Greece has accumulated too much debt. But the euro zone has been guilty of imposing far too much austerity on a battered economy. It’s loaded Greece up with unpayable debt and it has ignored the increasing desperation of ordinary Greeks. Europe’s politicians should not have been surprised that voters looked for a radical alternative in the Syriza party. But then Syriza has not handled this well at all. It has antagonised potential allies and destroyed the trust it needs to secure a better deal for Greece.

All up, what we are seeing now is a tragedy unfolding of epic proportions.