GreekWatch (Day 8 of 13) – “there is little option for the moment but to play for time by continuing to muddle through”

The EU and IMF review mission teams are still on the ground in Athens, and there are suggestions that they may complete their work over the next day or two. The review mission has been examining Greek progress to date in fulfilling the bailout agreement terms, and also proposals for future austerity and privatisations. There is to be a special meeting inBrussels on Monday next 6th June, of European finance ministers to deliberate over the release of the next tranche. The IMF is expected to make a judgement then also. And 6th June is scheduled to be the last day of the GreekWatch feature on here.

There is nothing firm emerging from the work by the review mission teams, but there is certainly optimistic speculation that a new Memorandum of Understanding will emerge which will set out detailed plans for a €50bn privatisation programme and a €28.4bn austerity programme.

Evening protests continue in Athens and other Greek cities. Yesterday an estimated 20-30,000 gathered peacefully in front of the Greek parliament in Syntagma Square, partly attracted by an earlier political speech by locally famous Greek composer, Mikis Theodorakis. At present these protests are not on the usual Greek scale, but then again the detailed austerity measures and privatization programme hasn’t been put to parliament yet.

There are conflicting reports about the IMF’s present state of mind. Earlier today, a German newspaper, the Frankfurt Allgemeine Zeitung suggested that the IMF would not contribute its share of the €12bn tranche due to be drawn-down by Greece on 29th June. The newspaper which was citing unnamed IMF sources, went on to claim the IMF would however contribute to a new additional bailout.  A German finance ministry spokesman later contradicted these suggestions.

Elsewhere the ECB is reported by Financial Times Deutschland, citing unnamed sources, to be softening its line on a re-profiling of maturing debt, done in agreement with bondholders. The London Financial Times carries an editorial piece in which it suggests “there is little option for the moment but to play for time by continuing to muddle through”.

Again without naming sources, or even organizations, Bloomberg is claiming that a proposal being cobbled together, presumably at the European Commission in Brussels (overseen by our Finnish friend, Olli Rehn) would see a carrot being offered to bondholders whose bonds are maturing, namely a higher coupon substitute and/or collateral.

On Day 4 of GreekWatch there was a list of likely options for Greece as follows

(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 affect Europe. 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.

Markets appear to believe that some form of deal will be reached which will allow the next tranche to be drawn-down though the EU may be forced to make up any shortfall in the IMF’s contribution. In terms of attaching credibility to the loudest noise, it seems that some plan for a form of maturing debt rollover is being cobbled together, with the threat of default for recalcitrant bondholders. This indeed is beginning to look like a muddle with vague Greek commitments being rewarded with further funding; okay there is talk in the Greek press of “decisive stances” but remember we are now nearly 13 months into the Greek bailout and the evidence so far is that stances and commitment melt into thin air in the Greek sunshine.

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Retail rents down 50% from peak in Ireland, and still under pressure

Property powerhouse and NAMA valuation panel member, CB Richard Ellis (CBRE) yesterday published its quarterly overview of the retail property sector inIreland. It’s a funny old report as it mixes together some statistics on retail generally and elsewhere confines its reporting to shopping centres or indeed two specific Dublin streets.  Whilst a little light on detail, it concludes that rent levels are still falling, though at a reduced pace and average retail rents inIreland are now down 50% from peak levels in 2007.  The note also claims that rent levels continue to come under pressure which suggests further declines in the short term at least.

The report confirms the challenging environment faced by retailers with retail sales excluding cars down 5% year-on-year (car sales benefited from a scrappage scheme which has distorted buying behaviour). Footfall on two of Dublin’s main shopping streets, Grafton Street and Henry Street is down 4-10% year on year, suggesting there are fewer customers. On a more positive note,  Ireland has attracted the presence of more global brands.

As regards capital values, the report cites the IPD property index which for retail premises indicates that prices are some 65% off peak levels. There was not one single retail investment transaction inIrelandin Q1, 2011 according to the report and although not stated, the inference is that sales transactions have tailed off across all retail sectors.

The reason? The challenging general economic conditions can’t be helping but the report identifies the proposed (or “threatened” or “committed to”, depending on which side of the debate you stand) abolition of Upward Only Rent Review (UORR) leases which may mean that commercial tenants see their rents falling to open market rents. UORR leases may have rent levels twice that of current open market rents. The Society of Chartered Surveyors in Ireland yesterday called for urgent clarification of intentions in respect of the issue from the justice minister, Alan Shatter.

Interestingly the report concludes that vacancy levels are more or less stable, with vacancy on the two survey Dublin Streets actually dropping considerably in the last 12 months. Because the report seemingly examines shopping centre and retail park vacancy, it is unclear if the “stable” claim applies across the board. Certainly many towns up and down the country seem to have no shortage of vacant premises, though these will not be in shopping centres.

And lastly, the report seems to adopt a curious position on the IMF/EU Memorandum of Understanding commitment for Q3, 2011 “the government will conduct a study on the economic impact of eliminating the cap on the size of retail premises with a view to enhancing competition and lowering prices for consumers and discuss implementation of its policy implications with the Commission services” (PDF page 79). CBRE say “in our opinion, eliminating the current cap would not necessarily enhance competition or lower prices for consumers” No evidence is offered in support of that opinion.

UPDATE: 30th June, 2011. One scheme not referred to by CBRE is the Northside Shopping Centre in Coolock where a 8,000 sq ft unit has just been leased to bargain shop chain, Euro 2. The annual rent is apparently €25 psf or €200,000 on a 10-year term with a five-year review.

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