Growth, more debt relief are priorities


Last Thursday was quite a shock for the Greeks due to the Eurogroup decision to put off the disbursement of the final bailout tranche of 15 billion euros and the European Central Bank ruling out a waiver extension and a Greek inclusion in its bond-buying program, also known as quantitative easing (QE). Analysts tell Kathimerini that it was the government’s decision to arbitrarily extend the value-added tax discount on five islands that has extinguished any hope left for the waiver and joining the QE program.

However, they add that the ECB might resort to an “indirect” QE after the Greek program ends, stressing that what matters most is that Greece introduces growth-boosting measures.

QE exclusion hardly came as a surprise, as Yvan Mamalet, senior European economist at Societe Generale Corporate and Investment Banking, tells Kathimerini: “We had a long-held view that Greece would probably not be included in QE. As long as Greek bonds remain below investment grade, their inclusion in the QE program necessitates that: 1) a waiver is in place which requires a financial assistance program; 2) the program review is closed; 3) a debt sustainability analysis and other risk management considerations. This is exactly what Draghi meant last Monday. Greece fulfills the first two criteria… but only until August 20, when the program expires. As such, there is a small window of opportunity between now and then to examine the last criteria – which is arguably much more subjective. Note that the so-called ‘other risk management considerations’ most likely include capital controls. To our mind, the ECB will likely refrain from including Greece in QE in this short period of time.

“As for after the program expires, if history is any guide, the ECB is unlikely to extend the waiver. Indeed, on March 2016, the ECB lifted the waiver for Cypriot government bonds as Cyprus exited the program. As such, the ECB, even with an enhanced surveillance framework, is likely to lift the waiver for Greece too, which would then exclude Greek bonds from both ECB refinancing operations and the QE program until one of the rating agencies upgrades Greece to investment grade.”

Yet an indirect QE is possible, according to Athanasios Vamvakidis, FX Quantitative Strategies Group director at Bank of America Merrill Lynch: “The ECB can easily argue that although the debt deal improves the situation substantially, long-term risks remain. This will be the excuse to continue excluding Greece from QE. However, the ECB could allow Greek banks to buy more Greek government bonds (GGBs). This could be a game changer and could act as QE, indirectly. I see no reason why Greek banks should not be allowed to increase their GGB exposure from currently very low levels, after August.”

More significant is the return to robust growth, says Oliver Adler, head of Economic Research at Credit Suisse: “Even if the bonds were to become eligible, the impact on Greek yields would not be that large given that the QE program will be cut back in October and will very likely end in December. So the sum of purchases would be quite minimal relative to Greek debt outstanding. What is more important is that Greek debt can continue to be used as collateral for banks’ liquidity operations. Beyond that, the actions of the Greek government over the next six months will be crucial. Most important is whether growth-enhancing measures are taken, such as further liberalization measures or what looks like a detail but is highly symbolic: finally getting started on the Elliniko construction project.”

The government will still be closely scrutinized, and any deviations – as in the case of the island VAT – could prove dangerous, as last Thursday proved, argues Mujtaba Rahman, managing director and Europe practice head at Eurasia Group: “The Eurogroup decision was a very cold shower for the Greek government – and a signal that it will continue to have to behave, even if the bailout and formal supervision that comes with it is about to end.”

Holger Schmieding, chief economist at Berenberg Bank, agrees: “The message from the official lenders is pretty simple: Stick to the agreed plan or you won’t get full support. Looking at the past, several times there have been delays in the distribution of loan tranches from the creditors to Greece. Therefore we should not be too surprised to witness another one. The official lenders, including Germany, want to make sure that promised reforms are being implemented, before paying out the money. The SYRIZA government has a track record of trying to delay or not implement some of the required reforms.The latest dispute is around 28 million euros; indeed, a small amount. As in previous cases, the lenders and in particular Germany are demanding that Greece find savings or extra revenues in other areas to offset the losses. According to European Stability Mechanism head Klaus Regling, Greece has already pledged to increase the VAT rate at the end of the year and to compensate for the lost revenue.”

Wolfango Piccoli, co-president of Teneo Intelligence, takes the Eurogroup decision a step further: “It signals that the creditors will keep Greece under close monitoring even in the post-bailout phase. Politically, it is also meaningful as it kills any chance of pension cut reversal,” he notes.

More debt relief, under strict supervision, will be key, according to Gabriel Sterne, global economist at Oxford Economics, and not the QE inclusion: “It doesn’t surprise me that the eurozone still seeks to demonstrate a degree of control over Greek policies. They have had their hands round Greece’s neck for so long it is quite painful to let go. But hopefully it will just be a delay in the disbursement of limited significance. As for the ECB not willing to proceed to purchases of Greek bonds, more debt relief and not ECB purchases are more important for Greece,” he points out.