Short-term deal may save the economy
An agreement between Athens and the institutions that will kick the can down the road may offer a brief respite but will not provide a lasting solution to the Greek crisis. Nevertheless, it may be the only realistic way forward to avert an even worse outcome if the creditors and the government cannot find some common ground. As always, time is not on Greece’s side as the economy deteriorates and deposit outflows continue.
Prime Minister Alexis Tsipras told Parliament on Friday evening that Greece is closer to a deal than ever before. At the same time he lambasted the proposals of the three institutions – namely the European Commission, the International Monetary Fund and the European Central Bank – tabled last Monday by European Commission President Jean-Claude Juncker in Brussels. He said nobody wants a rift but time is running out. The premier added that the government is committed to finding a solution that puts an end to unrealistic high primary surpluses and austerity and makes the public debt sustainable.
Analysts and others agree the main purpose of the prime minister’s speech was to force the other political parties, especially conservative New Democracy, to say in public they also rejected the proposals of the lenders. To that extent, he accomplished the goal. However, this may not make much of difference in the negotiations, which have stopped at the technical and Brussels Group level, since the financing needs of the state are big and pressing at the same time that economic conditions are getting worse.
Recent events highlighted how tight the state’s liquidity position is. By bundling four payments totaling 1.5 billion euros due to the IMF this month into one, now due on June 30, the state indirectly admitted “the extreme pressure on government funding,” as Fitch Ratings put it. The credit rating agency added, “The risk that Greece misses its larger IMF payment at end-June cannot be discounted,” although government officials have said the country has the money to make the first two payments to the IMF in June, surpassing 600 million euros. Nevertheless, it is clear a deal between the government and its creditors is necessary to release the disbursements so Greece can pay the IMF on June 30 and its other creditors over the summer.
In a recent note, HSBC calculated the country has to repay 2.2 billion euros to the IMF and 7.8 billion in bond redemptions and interest payments to the ECB as well as private bondholders who did not take part in the PSI debt restructuring in 2012. Assuming expiring treasury bills will be rolled over and a smaller than projected cumulative primary surplus by end-August, HSBC calculates Greece would need at least 10 billion euros to get through the summer.
The Greek government has said it seeks a “comprehensive, European solution” which includes debt restructuring, an EU-funded investment program to spur growth and an end to austerity. On the other hand, high-level European officials have stated Greece has to conclude the current adjustment program on the basis of the Eurogroup agreement reached on February 20 and then enter into talks for a new program or growth accord, whatever it may be called. So it is hard to see how the positions of the two sides can converge. Especially if the lenders do not want to reward the government for its stance so far, as some analysts suggest.
With the current program ending on June 30 and the ECB demanding a program in place to continue to fund the Greek banks, time has become an even bigger constraint. This is more so since deposit outflows continue unabated, exceeding 1 billion euros in total last week according to bankers. If they are right, the liquidity buffer from the emergency liquidity assistance (ELA) should definitely be less than 2 billion euros and potentially less than 1 billion. This explains why the Bank of Greece requested on Friday that the ECB lift the ELA limit, currently standing at 80.7 billion euros, according to various sources. This prompted Barclays to say in a recent report that the risk of capital controls was on the rise.
Therefore, some kind of program has to be in place for the ECB to fund the local banking system and Greece to be able to meet its debt obligations to avoid default. In addition, more time is needed for a new assessment of the sustainability of the pension system and the preparation of a report by the International Labor Office (ILO) on the necessary Greek labor market reforms to be taken into account in a new, comprehensive program or accord. The remaining time until the end of June is clearly not enough to prepare the actuarial study about the pension system and all other steps to have a comprehensive deal.
In this regard, kicking the can down the road may be the realistic way to get the Greek economy going and safeguard the banking system in the next few months since time does not suffice for a comprehensive deal. Extending the current program for a few months ensures both but keeps Greece on the hook since lenders will likely make disbursements conditional on certain prior actions. It is not an easy choice but continuing deposit outflows do not leave much room for maneuver.
