Following the informal Eurogroup meeting in Riga, Latvia, a consensus has emerged that the positions of the Greek government and the official lenders are not close enough to lead to a deal anytime soon. As a result, Greece has to rely on domestic borrowing to fund itself in the weeks ahead since it cannot count on the disbursement of official sector funds. The government may have bought some time by mobilizing the remaining cash reserves across the public sector but everybody knows it will run out of money at some point. So, many are wondering what the endgame is here.
Several months ago, a former high-level conservative operative who has chosen to sit on the sidelines surprised us with his theory about future political developments in the country. When nobody we know of was talking about it, he was of the opinion that Alexis Tsipras had a plan to dominate Greek politics for many years to come. According to him, Tsipras would most likely win the next general elections, as happened last January, and form a government with the Independent Greeks (ANEL) if SYRIZA did not win the absolute majority in the 300-seat Parliament. It got 149 seats.
The new anti-bailout government would negotiate hard with the creditors to secure an agreement and funding from the European institutions and International Monetary Fund in the following few months. Moreover, it would try to take advantage of its tough stance and boost its popularity. We asked again on Friday and he still held the same opinion, although more people share the same view by now. “The people may be concerned by the deadlock in the negotiations and the liquidity crunch but don’t listen to what the opposition parties have to say. The majority is still upset [with New Democracy and PASOK] and they like the government’s negotiating stance, which they contrast with its predecessors,” he added.
Of course he recognizes there are risks in this strategy, such as the imposition of capital controls heading toward the election date. However, the inability of the conservative main opposition New Democracy party to come up with an appealing, alternative policy message to the people partly offsets some of the risks, according to him. If he is right, the government will continue to negotiate hard and call new elections at some point with the goal of winning an absolute majority in Parliament. This will enable Tsipras to solidify his power in SYRIZA and dominate the political scene. With the new mandate, he will have a greater degree of freedom to clinch a new deal with the official creditors, or even part ways with them – with the second scenario being much less likely.
In the meantime, Greece has to be able to meet its refinancing obligations to the IMF and the private investors as well as pay wages and pensions in full. Don’t forget that the country has to pay about 950 million euros to the IMF in May and 1.6 billion in June. One payment of about 175 million euros is due in the first week of May and another of about 750 million euros on May 12. Treasury bill refinancing needs amount to 2.8 billion euros next month. Analysts estimate foreign holdings range from 150 to 400 million euros and have to be found from domestic sources.
Undoubtedly, Greece has surpassed expectations by managing to service its public debt without receiving official loans since last August. The Finance Ministry has sought a cash buffer of 2.5 billion euros from the mandatory transfer of cash reserves held by entities of the general government via a legislative act. Moreover, unlike in previous months, the state is projected to run a primary budget surplus in both May and June.
It is possible for Greece to meet its funding needs in May, assuming that the Greek banks have sufficient collateral to tap the emergency liquidity assistance mechanism (ELA) of the Greek central bank. The European Central Bank raised the ELA limit by an additional 1.5 billion euros to 75.5 billion euros last Wednesday.
Greek banks’ available collateral is the main constraint blocking access to ELA. This will be more so if the ECB decides to impose higher discounts on securities and loans the banks post for collateral at the Bank of Greece. Most analysts think the ECB will not take any measure that may hamper the banks’ liquidity and the state’s ability to meet its obligations without EU political consent.
At this point, the differences in negotiations between Greece and its creditors look difficult to overcome, but the country could still fund itself in May. Of course, this situation has started to take a toll on the private sector and cannot go on for a long time since the country will run out of money. The government should take the initiative in the next few weeks to put an end to all this by either making some concessions to reach a deal or take the case to the people. In our view, domestic politics plays a major role in the government’s decision making. Its popularity ratings may be high now but have started to slip. So, both economic and political reasoning call for action.