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Archive for May 28th, 2011

Again, it seems that the IMF and EU review mission teams are diligently and quietly working away on the ground in Athens whilst all hell is breaking loose everywhere else.

First up, the European Commission seems to be getting exasperated at the lack of meaningful progress by politicians in Greece. “Time is running out” said our Finnish friend, the Commissioner for Economic and Monetary Affairs, Olli Rehn. What Olli was hoping for yesterday, was consensus amongst the main Greek political parties to the latest round of austerity measures and privatisation programme. Despite a three-hour (or five-hour, depending on your sources) extraordinary meeting of the heads of the main political parties in Athens yesterday, under the auspices of the Greek president, no consensus was forthcoming; indeed from this perspective, political relations in Greece seem to be fracturing with recriminations getting  personal. What the EU wants is consensus to a road map of austerity and privatisation measures, it doesn’t want unpopular commitments unravelling a few months down the road as politicians jockey for advantage. Greece had its last elections in 2009 and the next ones are not due until 2013. The ruling PASOK party has 160 seats in a 300-seat parliament and it has additional allies in other parties but still the concern lingers that the €110bn bailout deal which was agreed in May 2010 may founder amidst political manoeuvres. If the EU was looking to early elections to provide a mandate for the bailout, then those hopes were dashed when the incumbent prime minister ruled out early elections after yesterday’s marathon meeting.

Next up, the IMF and their acting managing director, John Lipsky repeated the IMF’s mantra yesterday that restructuring is not foreseen as long as Greece adheres to the bailout terms. What we all want to know is whether or not the IMF will withhold its €3.3bn contribution to the next €12bn tranche draw-down by Greece from the €110bn bailout in June 2011, and if the IMF is demanding that the EU provide assurances to fund the remainder of Greece’s maturing debt in 2011 and possibly 2012. And we’re unlikely to get any comment from the IMF on this question before 6th June 2011 when the review mission in Athens is due to conclude its work.

There was a new voice adding shading to the debate yesterday when French president, Nicolas Sarkozy spoke in favour of bondholders sharing in the solution of Greek’s present woes. What he was calling for seems akin to the Vienna Initiative in 2009 where bondholders agreed to roll-over maturing debt. He specifically wasn’t talking about unilateral burning of bondholders. The national government perspective was backed up by Michael Meister, the CDU (Angela Merkel’s lot) finance policy spokesman who said Greece’s creditors may accept an extension of bond maturities if the Greek government adopts a more aggressive approach to cutting debt. With 10-year bonds trading at 55c in the euro and signs of growing turmoil in Greece, it’s hard to see bondholders being understanding.

The ECB has been silent on Greece in the past 24 hours.

So on Day 4 of GreekWatch what is the likely prognosis for the Greek patient?

(1) Greek politicians impose the austerity and privatization plans agreed with its creditors. This will certainly be attempted in early June in parliament but it seems messy without consensus. And unionists and protesters seem to be chomping on the bit to hit the streets during the hot summer months.

(2) Greek’s bondholding creditors agree to roll-over debt that matures in 2011 and possibly 2012. Seems unlikely given the likelihood of Greek default and Greece’s slow progress with complying with the bailout agreement

(3) The EU either picks up the entire tab for the next tranche or provides an assurance to fund the roll-over of Greek debt because the IMF won’t risk more funding and the immediate consequences of default will disproportionately affectEurope. This is messy because it may require an additional bailout (€60bn according to some estimates on top of the existing €110bn) and will require national parliament approval in Germany, Holland and Finland who all seem increasingly hostile towards Greece.

(4) Greece doesn’t get the next tranche at all and defaults which would probably lead to all Greek banks being nationalized and capital controls to prevent euros leaving the country/banking system. Given that Greece still has a primary budget deficit, it would need either immediately close that or else exit the euro.

(5) The IMF and EU provide the next tranche without receiving sufficiently tangible commitments from Greece, because the wider consequences of default outweigh €12bn.

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