Unclear strategy has everyone puzzled

The government says it wants an honorable compromise with the creditors, who are in turn demanding a credible reform list. However, the distance separating the two sides remains large as the progress in negotiations is slow, allowing the ugly scenarios of default and “Grexit” to be assigned higher probabilities by analysts and others. The end of this standoff will depend on the government’s intentions, strategy and cash reserves and the stance of the official creditors. At this point, the impasse looks set to continue despite Greece’s pressing liquidity needs.

It is widely known that the general government’s cash buffers are running out. The Greek state paid 194 million euros in interest to bondholders last Friday and is expected to make another interest payment of 80 million euros to the ECB on Monday. As far as next month’s debt payments are concerned, the key dates are May 1 and 12 when the state is due to pay 200 million euros in interest and 746.6 million in a tranche to the IMF. Also, it has to refinance maturing T-bills worth 1.4 billion euros on May 8 and 1.4 billion on May 15, of which 150 million euros belong to foreign funds, before getting into June, where the debt repayment schedule is heavier. It should be noted that the dependence on internal sources to meet debt payments is having an adverse impact on liquidity but has also reduced the country’s gross public debt.

Nevertheless, the state may still be able to meet its basic obligations in May. This could be the case if tax revenues do well, more expenditures are postponed (building up arrears), and all general government entities are mandated to transfer their cash deposits to the central bank, making them available for state financing, some government officials think. An estimated 2 to 3 billion euros could be transferred provided the ECB allows Greek banks to replenish this amount by getting more loans via emergency liquidity assistance (ELA), according to pundits. Alternate Finance Minister Dimitris Mardas referred to the latter solution, saying there is a law dating to 1951 which allows this transfer, pointing out that similar laws exist in other EU countries such as the Netherlands. Of course, the day of reckoning could be delayed further if Greece was able to get a loan from another country. Germany’s Der Spiegel mentioned Russia on Saturday.

Of course the government would like to get EU bailout funds instead of mobilizing the last domestic resources and squeezing domestic liquidity further, but this does not look likely judging from a series of statements made by Greek, EU and German officials over the last few days. The government’s so-called red lines on labor market reforms, pensions, value-added tax and the development of public property, outlined by Prime Minister Alexis Tsipras to Reuters, seem to be the red lines of the official creditors as well. This has created a deadlock, and while government officials appear optimistic that an agreement in principle is possible before the end of April, the odds do not look good at this point.

So it does not surprise that 2-year Greek bond yields surpassed 27 percent last week, the 10-year yield surged toward 13 percent, pointing to a possible default, and the general index of the Athens Stock Exchange lies at a multi-decade low. Talking to market participants here and abroad, one comes to two conclusions. First, investor interest in Greece is much lower now than it was back at the peak of the crisis in 2012. This reflects both the fact they have considerably reduced their exposure to Greek assets and the firewalls erected by the EU since then, decreasing the risk of the crisis spreading to other EU periphery members. Second, the strategy of the Greek government is not clear to them. They cite conflicting statements by ministers on reforms, other statements about German war reparations and allowing jihadists to go to the rest of Europe if the crisis gets worse, and they wonder how all this helps Greece’s negotiating position.

Others are also puzzled by the government’s tactics and strategy so far. Although its message is clear – that is, no more austerity – its view on structural reforms diverges considerably from that of the lenders. The leftist-led government has tried to put aside the differences on reforming pensions, the labor market and others and play up the fight against corruption and tax evasion in the last couple of months. But the reforms have caught up again and the differences have resurfaced.

Pragmatists expect the government to bow and implement some of the reforms sought by the lenders just before it runs out of money, either in May or June. They cite its retreat in February when the state coffers were empty and the risk of capital controls was high.

However, others disagree, expecting it to hold on to its red lines even if it leads to a default within the euro. At this point, the administration looks as if it is trying to buy more time for negotiations by mobilizing all available resources. Some say the goal may be to include the pending reforms in a new, more attractive agreement, containing debt relief measures. The government could take this deal to the people via a referendum or even call new elections.

All in all, the government’s strategy is not clear to the market and others. Whether this is intentional and part of the strategy or not remains to be seen. What is certain is something else. The strategy will be judged by the final outcome.

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