The moment of truth is approaching

The government is facing on Monday its second litmus test since it took power in late January. It passed the first test on February 20 by agreeing to a four-month extension of the economic policy program but it is highly doubtful whether its proposed reforms will convince the Eurogroup to disburse a portion of the eurozone tranche. This will put public finances under more strain and bring the moment of truth closer.

If Goldman Sachs is right, Greece will have to repay about 270.3 million euros to the International Monetary Fund on Friday, 450.5 million euros on March 16 and 270.3 million euros on March 20. Moreover, it will have to roll over 1.6 billion euros worth of treasury bills on Friday and another 1.6 billion euros on March 20.

It may also have to make some interest payments as well during this period, increasing the amount it will have to pay to its creditors. In addition, it will have to pay wages to civil servants and pensions in excess of 2 billion euros at the end of March.

This is not an easy task because budget revenues are lagging and the government wants to fulfill its obligations to creditors, civil servants and pensioners. By all accounts, the state has to borrow all the money it can find, i.e. the bank deposits of social security funds and state entities, and postpone other payments to suppliers and other third parties as well as tax rebates. Even so, it may not be able to meet all of its obligations this month if revenues do not pick up and some kind of external help does not arrive.

Informed people say the state has even contacted the Greek subsidiaries of multinational companies for short-term loans, indicating the seriousness of the situation.

As far as we know, this Wednesday’s T-bill auction should not hold any surprises because there is no foreign participation. So, Greek banks will simply roll over their T-bills. As far as the repayment of the IMF loan of 270.3 million is concerned, there should be no problem as well if, as assumed, some entities agree to provide a short-term loan to the state. However, things will get much tougher from March 16 on.

Half a billion euros is not a small amount and Greece will have to pay it to the IMF on that date. In addition, foreign investors hold approximately 500 million euros in T-bills expiring on March 20.

Since Greek banks are prohibited by the European Central Bank to take up the slack, the government will have to find the money it requires from elsewhere. Namely, the bank deposits of state entities or state-controlled companies or another source. This will not be easy either. We know the boards of some state entities will resist because they could face criminal charges if the loans are not repaid in full by the state.

The government thought of getting over this obstacle by issuing ministerial decrees to provide immunity to the boards from criminal charges. But the ECB does not allow these particular bank deposits be replenished by ELA (Emergency Liquidity Assistance) loans from the Bank of Greece, as this would be considered state aid, according to our sources. This means the state cannot count on these particular deposits to fund its borrowing needs. Of course, there is no problem if the boards decide by their own free will to lend the deposits to the central government. To help some of these boards change their mind, the state has reportedly offered higher interest rates for their cash deposits.

Of course, this is a rather static analysis based on the assumption that Greek depositors and taxpayers will behave normally even if the Eurogroup deems inadequate the list of reforms e-mailed by Finance Minister Yanis Varoufakis to the president of the Eurogroup, Jeroen Dijsselbloem. Pundits agree the Eurogroup is not likely accept the list of reforms presented by Varoufakis.

The problem with this list is two-fold in our view. First, the Greek finance minister and the technocrats of the institutions may differ greatly when it comes to its pricing since there were no prior consultations as far as we know. Second, the list is about increasing tax revenues and spending money on social programs. This may be in line with the tax-and-spend policies of the government but it may not be welcome by other eurozone member-states. The perception of the outcome of the Eurogroup meeting may influence the behavior of the Greek public and may speed up events or provide more time for negotiations.

Once again, the government and the country are at a crossroads. In our view, the government should work with the eurozone to bridge their differences and put an end to this row. To this extent, critical statements of the ECB made by senior government officials do not help.

The omens do not bode well for Monday’s Eurogroup and this may speed up developments at a time when public finances are under strain. The moment of truth seems to be approaching and Prime Minister Alexis Tsipras has to rise to the occasion and make a choice.

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