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.