Athens must commit to reforms, says IIF executive

WASHINGTON DC – “While personality is important in negotiations, more important still is substance,” says Hung Tran, executive managing director at the Institute of International Finance (IIF), commenting on Prime Minister Alexis Tsipras’s indirect sidestepping of Finance Minister Yanis Varoufakis and the rearrangement of the team of Greek officials negotiating with the institutions. He adds, “The key question remains whether the Greek government is prepared to commit to concrete policy measures sufficient to reach a compromise agreement with the Eurogroup.”

In his discussion with Kathimerini in Washington DC, the low-key Tran notes that the Greek economy showed signs of recovery last summer, and warns that the longer the stalemate with the Eurogroup lasts, the weaker the credit quality of Greek collateral becomes, adding pressure for a compromise solution. Finally, he says that the issue is about willingness and commitment to the right policy, not partial payments.

How close is Greece to a default, and how can it be avoided?

Greece will default when it runs out of euro funds to meet its obligations when due. The government’s decree requiring local governments to deposit cash with the central bank could give the central government access to an estimated 1.5 billion euros. This measure, however, is seen as a last-ditch effort to raise cash – posing the question of what the government will do next to get money if there is no progress with the Eurogroup and institutions to release the last tranche of 7.2 billion euros in the program.

At the end of the day, Athens would probably opt to pay salaries and pensions, and not the International Monetary Fund. What would that mean in practical terms?

If Greece fails to pay the IMF, nothing practical will happen right away. Greece will get a 30-day grace period, during/after which the Fund will engage with Greece to discuss ways for Greece to make payments. If there is no progress after a period of time, the IMF Board will deem Greece in arrears with its payment obligations and will ask Athens to rectify the situation. Eventually (assuming no progress), Greece could be subject to sanctions, including being denied access to the Fund’s facilities or even voting rights. In any event, during this whole period, Greece will not be able to access the remainder of the current IMF program for Greece scheduled to last till 2016.

Could Greece default but remain in the eurozone?

Legally speaking, there is no connection between default and euro exit. However, sovereign default will make it very difficult for the European Central Bank Governing Council to authorize emergency liquidity assistance (ELA) access to Greek banks, without which Greek banks will face a significant funding problem… especially since bank deposit and capital outflows could increase.

What was the sense among finance ministers and central bankers about the Greek situation during the recent IMF Spring Meetings?

Frustration that the Eurogroup and Greece have not been able to make much progress in reaching agreement on concrete policy measures to allow Greece to move forward.

How is Prime Minister Alexis Tsipras’s government doing so far?

I think the best answer is reflected in a recent poll (by the University of Macedonia) according to which only 45.5 percent of those polled said the government’s strategy of negotiation with creditors is the correct approach, down from 55.5 percent in late March and 72 percent in early February. At the end of the day, the Greek people have to decide if they want to stay in the euro area and, if so, what they need to do to keep the euro. More recent polls seem to indicate that a large majority of Greeks do want to keep the euro.

Tsipras has reshuffled his negotiating team and indirectly but clearly removed Varoufakis from the helm. Could that be helpful in reaching a deal, and, if so, how?

While personality is important in negotiations, more important still is substance. The key question remains whether the Greek government is prepared to commit to concrete policy measures sufficient to reach a compromise agreement with the Eurogroup.

Is the Greek debt sustainable or should there be another haircut, this time on the official sector and not the private investors that now hold just 17 percent of the debt?

Apart from IMF loans and Greek government bonds held by the ECB in its Securities Market Program (SMP), Greek government debt owed to European partner countries, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) (which is the majority of the debt) is of very long maturity (between 2040-50) and with low interest rates. Even so, further extension of maturities and interest rate reduction could be considered if Greece were committed to concrete reforms to improve the economy. As such, debt servicing and repayment (to the Eurogroup) has not been a burden on the Greek economy – which showed signs of recovery last summer.

Can/Should there be partial installments of the pending payments from the institutions if the negotiations show some progress?

There is a sense of frustration and hope that Greece and the Eurogroup can find a practical compromise to release the funds to help Greece stabilize the economy. So the issue is willingness and commitment to the right policy, not about partial payments.

Even US President Barack Obama’s administration seems to be more critical of Athens. Why?

The US thinks that failure to resolve the crisis and keep Greece in the euro area will create significant economic and political risk to Europe and the global economy. At this juncture, a commitment by the Greek government to implement a minimum set of policy measures would be critical in breaking the impasse.

Are Greek banks in a position to act as a facilitator/engine for the much needed growth of the Greek economy?

According to the Single Supervisory Mechanism (SSM) at the ECB, and consistent with ELA rules, Greek banks are deemed solvent by their supervisors, but are experiencing liquidity difficulties. The liquidity situation seems to be deteriorating, and as such Greek banks are not likely to be in a position to fund lending to support growth in the economy.

Will the ECB apply a higher haircut on the collateral offered by Greek banks for ELA. If so, to what extent, and how could it influence the financial system?

The ECB Governing Council is reportedly examining the credit quality of the collateral used by Greek banks to borrow from ELA. Any increase of haircuts would effectively reduce the amount of liquidity available to Greek banks through ELA. Naturally, the longer the stalemate with the Eurogroup lasts, the weaker the Greek collateral’s credit quality becomes, adding pressure for a compromise solution.

How will the ECB decision to implement quantitative easing (QE) affect the eurozone economy?

The ECB’s QE announcement and implementation in the past two months have begun to improve recovery and inflation expectations in the euro area. We expect euro-area growth to accelerate to 1.6 percent this year from 0.9 percent in 2014.

What is the role of the IIF and how closely are you following the Greek crisis?

The IIF is the leading global association of financial institutions. Our members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. Our mission is to support the financial industry in prudently managing risks; to develop sound industry practices and standards; and to advocate for regulatory, financial and economic policies that are in the broad interest of our members and foster global financial stability. In 2011-12, the IIF was requested by European finance ministers to help organize private sector holders of Greek government bonds to engage in discussion with relevant authorities, which eventually led to the March 2012 Greek government debt restructuring. The IIF is not officially involved in the current Greek negotiations.

Is Germany’s insistence on austerity or the US approach of more expansive policies the right answer for the present situation?

The optimal policy mix is an appropriate combination of fiscal stimulus, if the country still has some fiscal space, monetary accommodation and concrete structural reform/banking recapitalization measures to promote growth.

Where do you see a healthy euro/dollar exchange rate for the world economy?

The US dollar’s appreciation in the past year largely reflects fundamental developments, including stronger recovery in the US and the ending of QE and expectation of tightening by the Fed. Similar USD appreciation in the future would clearly push the USD exchange rate away from fundamental relationships with other major economies, including Europe.