This is the third in the weekly GreekWatch series (Week 1 is here, a mid-week special is here and Week 2 is here), it follows on from a daily GreekWatch feature at the end of May which chronicled the days leading up to the Greek/IMF/EU staff-level agreement at the start of June.
First up, the timeline
28th/29th June (Tuesday/Wednesday) – Greek parliament debates and votes on austerity and privatisation agreement, that has been agreed with the IMF and EU. Loads of media catastrophising, watch out for otherwise calm journalists dial up the panic, it stokes up the value of the media after all.
3rd July (Monday) – Meeting of the Eurogroup (17 EuroZone finance ministers chaired by Luxembourg’s prime minister, Jean-Claude Juncker and including our own Minister for Finance, Michael Noonan), agreement of second bailout structure
8th July – IMF board due to meet to agree release of the next tranche of bailout number one (a total of €12bn which will bring the Greek draw-downs to €65bn from a total bailout of €110bn)
11th July – final agreement by troika of EU, ECB and IMF to the Greek draw-down of the next tranche of bailout number one, and potentially agreement of second bailout
15th July –Greece is due to start repaying maturing debt for which it presently doesn’t have funding. This is the backstop deadline for sorting out Greece’s immediate issues; otherwise there will be a default. And a messy one at that, if not planned.
Secondly, what’s happening to the second Greek bailout?
Well this is indeed a little puzzling as it seems agreed that Greece does in fact need a second bailout of about €120bn (that’s on top of the €110bn first bailout agreed to last May 2010) yet there seems to be little progress with agreeing the terms. The main reason Greece needs the second bailout is that the country has existing bond debt that is maturing in the next three years and with Greek bond yields still in the stratosphere, Greece will be unable to borrow fresh funds to repay existing debt. Here’s what Greece has to repay:
So in 2011, 2012, 2013, 2014 Greecehas close to €150bn of maturing debt, which if you deduct that already repaid in 2011 gives you about €120bn. These are rough numbers.
The IMF’s own operating rules forbid it from lending to debtor countries unless those countries have the prospects to repay/roll-over maturing debt in the next 12 months. And Greece doesn’t, which is why a second bailout has to be agreed by 8th July when the IMF board meets to decide whether or not to release the €12bn tranche of bailout number one.
As regards the second bailout, the plan hasn’t changed. Greece is to meet some of the requirements itself with additional privatisations (€30bn was mooted). Then there is to be a purely voluntary agreement by about €30bn worth of existing private bondholders, banks and pension companies for example, to extend their loans to Greece by a number of years (seven is mooted) in return for sweeteners (increased interest rate, preferential creditor status might be on offer). And this is where we’re firmly re-located to Alice in Wonderland; French president, Nicolas Sarkozy says discussions with French banks and pension companies have been positive and the French are hopeful that their banks will agree to an extension of credit. Germany likewise seems upbeat. But why on earth would an existing bondholder accept an extension of maturing Greek debt when instead, he could insist on getting repaid now and then he could immediately go out and buy Greek 3-year bonds that pay 30%? The answer of course is that he won’t unless there is an element of threat or arm-twisting. But if there is, the ECB won’t agree to the arrangement and furthermore the independent (that is, non-European) ratings agencies who referee these matters will blow the whistle and declare a default. Complete Alice in Wonderland and the betting on here is that the EU or EU/IMF will stump up the entire second bailout (less the additional Greek privatisation proceeds) – and when we say EU, it looks like we won’t mean non-EuroZone countries like the UK. And further the betting is the IMF will not agree to the second bailout, or will not agree to its contribution being as high as one third, which has been the IMF proportion in Greece’s first bailout as well as Ireland’s and Portugal’s.
What’s likely to happen?
The betting here is that the austerity and privatisation plan will pass in the Greek parliament on Tuesday. The prime minister nominally controls 155 of the 300 seats though there appear to be two flagged dissenters, let’s call them Jackie Healy-Raeandrou and Michael Lowryious. If there is a serious prospect of the Greek parliament voting against the plan, then expect to see pork-barrelling on a whole new scale. If the worst happens on Tuesday this week, I would expect an immediate intervention by the EU and an alteration/softening of the plan and its immediate re-submission to the Greek parliament where it will be passed. Nothing is certain but I think there are good odds of this happening.
As for the media predicting Armageddon, well it is a little amusing to see reporting which implies Athens is ablaze with riots and protests. It is a city of 4m (four times bigger than greaterDublin) and unless there are 250,000+ protesters then I don’t think the Greek government will be too concerned. There is a permanent non-political, non-union protest in front of the Greek parliament buildings in Athens which grows to perhaps 10-20,000 protesters each evening as people get off work. It’s noisy and they appear to be dab hands with green laser pens but it’s peaceful and frankly unlikely to change much. There is a two-day general strike planned for this coming Tuesday and Wednesday, there is likely to be violence but the betting is that demonstrations will be too small and ineffective to change anything happening in parliament.
So by the 15th of July, the expectation is that the IMF/EU will release the fifth tranche of bailout number one1 and will have in place an agreement, in principle if not indeed in fact, for the second bailout. I have seen some suggestions that the second bailout will increase Greece’s debt:GDP of 160% but that isn’t necessarily true as the bailout is presently intended to repay existing debt that is maturing.
So this crisis may well pass. Greece will have its austerity plan which it probably won’t implement so we might be back here in September/October 2011. However it looks as if Spain is reaching a funding tipping point and that €660bn of debt that Spain has to repay/roll-over in the next 24 months might be the final denouement in this crisis because at that point, we might have reached the limits of EU bailout funding, unless the EU wants to start printing more euros..
Are there opportunities here for Ireland?
Well it’s at least good that we are considering the possibility of opportunities because up to now, we appear to have been so brow-beaten that we have just rolled with events. Sadly however, unless Ireland wants to contemplate vetoing a second Greek bailout then no, it looks like the €24bn (less some discounts on subordinated bondholders) will be shovelled by the government into the banks in late July. It doesn’t look as if France is amenable to the collegiate, solidarity type of approach which will be exemplified in the second Greek bailout, or at least she is isn’t from Taoiseach Enda Kenny. As for opportunities to burn senior bondholders, Minister Noonan’s interview on RTE radio today was just depressing and will be covered in a post later today.
NAMA Wine Lake 
Noonan on RTE radio today…….
He confirmed Ireland’s decision to excuse senior unsecured unguaranteed bank bondholders from “participation” has been entirely voluntary – at least under the new government, making it clear that JCT throughout many conversations never said or threatened that such action might lead to the ECB withdrawing its liquidity provision to Irish banks. He directly contrasted this with the threat made in respect of the collateral eligibility for Greek paper recently. He then went on to say “but a nod is as good as a wink to a blind horse”.
So Irish negotiators have done the ECB a great favour of behaving as if they had been threatened – and granting the ECB the positive benefit to their negotiating position of the threat – but without making the ECB suffer the consequences in terms of reputation or responsibility for the ultimate course of action of having made the threat. What a gift.
Ireland’s negotiators should have extracted the threat in reality if they were going to proceed as if it had been made. Once made, the threat could have been used to batter the ECB at every opportunity, firmly dumping discontent among the public (not just in Ireland) on the institution. It is not hard to imagine a popular movement of discontent among the wider European population over this (now) clearly ECB instigated policy. Getting rid of that unpopularity would have now been part of an incentive for the ECB to back down on the question of senior bondholders. as it is Ireland’s government have shielded them from the flack.
Who is it that is coming up with Ireland’s strategic thinking?
@grumpy, great minds etc, it’s taken some time to transcribe the interview, RTE’s media player hangs if you pause and play more than twice. But there is now an entry examining what the Minister said with the transcript, and indeed your comment seems very much to match my own sentiment.
@NWL
“it’s taken some time”. It has taken a hell of a lot of time to maintain your blog to such a high standard in terms of reportage and comment. Much appreciated .
@Grumpy:
Initially I would agree with you re flushing out the ECB into the open and force them to show their smudgy colours. However, when one starts a fight with an opponent such as the ECB (and they are now an opponent), one had better be determined to see it through to the end.
So the timing of the announcement that Ireland is going to burn Anglo and INBS unsecured bondholders is important.
But it had better be before the next big tranche is due to be repaid.
As for the ECB anti-contagion defence, it looks like all of EZ is infected now anyway and has been for some time. Interbank lending and banks bonds for all but the largest banks are finished for years to come. Ditto with State bonds. Both banks and States wiill have to fund themselves from their citizens savings, significant portions of which are currently tied up funding Franch, German and Dutch banks and governments.
The anti-contagion defence is a smokescreen to scare the populations while bondholders get their money back from taxpayers. It is also a useful smokescreen to cause deposit runs from the periphery to the core, so that it superficially appears that there are no problems at the core. The pity is that the smokescreen has worked so far.
@NWL
Something is confusing me on this Greece “Bailout”.
Supposedly there is a three monthly review in the “Bailout”.
How come that 3 review’s were conducted, and did not show up a problem and, suddenly the fourth review did?
@southofdub, a good question. If you look at the previous review mission statements from the IMF that have been pre-cursors to the release of the four tranches to date (the €12bn tranche in July 2011 will be the 5th tranche) then you will see concerns being raised but the overall tenor is that progress is being made in accordance with the bailout plan. But it is clear that the IMF was not 100% happy. Why did the May review lead to the present crisis. Two reasons I suppose, one is that it is now becoming painfully obvious that Greece cannot feasibly return to the bond markets this year or next to roll over maturing debt, in March Greece’s 10-year bond was still only at 12% (close to where we are today) but in April once Portugal flagged its need for a bailout, the Greek rate went into the stratosphere of 16%+. The other reason seems to be that the criticism of Greece’s progress in previous IMF reports seems to have met a tipping point and it seems obvious that Greece is not going to meet the terms of the first bailout agreement.
Past IMF mission review reports are here
http://www.imf.org/external/country/GRC/index.htm
Don’t take the above as gospel because I wasn’t really following Greece closely until May when the IMF threatened to abandon their review mission (which might have led to it pulling the plug)
Greece will eventually default. It is only a matter of “when?”. They are getting a €12 billion patch while everyone scratches their heads wondering how they are going to find them the next €100 billion.
If the current Greek Govt. falls while implementing the proposed cuts, the country’s position looks ominous. Even with the 40 seat bonus given to the largest party, no party would be in a position to form a government.
In a recent poll see link to report http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_12/06/2011_394450 , there would be at least seven parties in Parliament. New Democracy even with the 40 add ons might only have 120 seats. Even with the Greek Orthodox party they would be unable to form a Govt. If PASOK manage to remain the largest party, they too would be unable to hold on alone. However at least they might be able to put together a coalition with the Greek Communist Party (KKE), if there was some room to move on the restructuring required.
However it certainly looks very dangerous.
There would be a ragbag of the far left around
One things for sure the ‘noise’ levels with regard to default and leaving the euro has upped considerably in the past year. Where would that leave the notes in circulation if a Euro exit happened…?
I’ve often thought that the acronym PIIGS is a bit lazy, correctly it should be
VYMTS
http://www.ecb.europa.eu/euro/banknotes/html/index.en.html
More interestingly, maybe future note ‘value’ depends on where they were printed as opposed to who order the notes as detailed late on in the wikipedia site.
http://en.wikipedia.org/wiki/Euro_banknotes
Irish notes ‘T’ were printed in Dublin, Vienna and UK.
Interestingly the German printers G&R both printed ‘Y’ currency (Greece).
From my own observations over the last 3 years all of the notes coming out of the drinklink are ‘X’. There are a surprising number of ‘V,S,&Y’ 20’s & 10’s in circulation here in Ireland, never too any notice of the farmers fivers.
Any VYMTS that hit my purse go to the front of the Q for a quick exit.
Maybe “Mis VYTS” would be a more appropriate acronym.