May 04, 2015


Modest progress, but not on a trajectory towards a deal

Negotiations between Greece and the Brussels Group made some progress but not enough for an agreement. The Greek side moved on VAT reform, offering to reduce the exceptions from VAT rules significantly and cut the tax rates, according to FAZ. But there was no progress achieved on labour and pension reform, two crucial areas for an agreement. The two sides are also apart on measures to close the fiscal gap and foreclosures. While the Greek side seems more optimistic that an extraordinary eurogroup meeting will take place, according to Kathimerini, expectations are low on the creditors side, with FAZ quoting one representative saying that the eurogroup next week might be in the position to issue a political declaration to praise the improved atmosphere in those talks, but any release of funds seems unlikely. Even if there is an agreement, it would still have to be adopted by the Greek parliament. Talks will resume today after a pause on Sunday when Tsipras met with members of the economics team, and Yanis Varoufakis on vacation in Aegina according to Greek Reporter. Tsipras is now planning to meet with the heads of the creditors these coming days. On Saturday Varoufakis said in an interview that Greece can do without a new bailout, but “one of the conditions for this to happen … is an important restructuring of the [current] debt,” according to this article.

The coming days will be decisive for Greece's fate:

Kathimerini writes that on May 6 the ECB might decide to increase a haircut on ELA collaterals. The ECB is reportedly working on three scenarios: Haircuts of 44%, 65% and 80%. The current rate applied to Greek banks’ collateral is 23%. Should the ECB choose the more drastic scenario, local lenders would find it increasingly difficult to come up with the amount of collateral needed in order to maintain the flow of liquidity from the ECB.  

On May 8 and 9, Jeroen Dijsselbloem will travel to European capitals to meet with Wolfgang Schaeuble, Michel Sapin and Pier Carlo Padoan to talk about Greece ahead of the eurogroup meeting on May 11.

According to Macropolis the Greek government has enough cash to cover the next payment of about €200m to the IMF on May 6, given the revenues collected at the end of April as well as €90m brought in by the 100-instalment scheme for unpaid social security contributions. But it is less clear that the funds suffice for the €750m repayment to the IMF loan on May 12.

Reuters writes that three of the top four credit rating agencies say they would not cut Greece's rating to default if it misses a payment to the IMF or ECB. This assessment could keep ELA funding alive as the ECB cannot accept any securities issued by a government in default. Standard and Poor's, Fitch and DBRS - three of the top four - all say that as the IMF and ECB are not standard creditors, a missed payment to either would not be classed as a default. Moody's also agrees with the three on a missed IMF payment but differs on the ECB. They argue that not paying the ECB would constitute a default as the bonds it holds are potentially marketable and so are similar to any other marketable debt. From the episode in 2012 they expect the ECB only to refuse when all four agencies declare Athens in default. There was a quick U-turn then, after the eurozone put €35bn in an escrow account to cover for problems during restructuring. Legal experts conclude that the risk of automatic 'cross defaults' is minimal, though there is a risk that the EFSF might want its money back. Still, defaulting on the ECB is not considered a good idea, as even if it keeps ELA alive it would put the ECB in a powerful position to introduce higher 'haircuts' for ELA funding, thus suffucating Greek banks further.

The highest administrative court, meanwhile, is expected to give its verdict this week on pension cuts that were introduced over the last couple of years in accordance with creditors demands. Skai television is reporting that most of the court's judges are leaning towards ruling the pension cuts as unconstitutional, according to Kathimerini. Alexis Mitropoulos told Skai that if this is the case, the cost of such a decision is €3.5bn-€4bn, while the head of the Social Security Romanias estimates the costs to amount to €1.5bn. Mitropoulos also said that the same judges consider a zero deficit clause for pension funds and further cuts as unconstitutional. Macropolis looked at the details of the 2012 pension cuts and concluded that an unconstitutional ruling has severe consequences not only for the current negotiations but also any further bailout talks.  

In an interview with Der Tagesspiegel and ThePressProject International, Syriza MP and economist Costas Lapavitsas gives us an insight into Syriza’s thinking. Lapavitsas tells the papers that Syriza’s programme and creditors demands are mutually incompatible and that the only way forward is to negotiate a consensual Grexit. He says the government has a mandate to fulfil its programme and only indirectly to do everything to stay in the eurozone and calls for open debate about Grexit. After five years of “torture,” Lapavitsas concludes that monetary union undid the goodwill generated in Europe by the EU. Instead of more solidarity the common currency created more divisions [This is what the sociologist Lord Ralf Dahrendorf had predicted]. He calls the euro a historic mistake, and predicts that the eurozone will not last and that its breakdown might even threaten the EU. He does not believe in a European demos and calls the idea of Europe as a transcendental entity a fiction. Instead he dreams of a renewal of the Greek economy based on the recovery of domestic demand and the activation of small and medium sized enterprises, not a recovery driven by exports.

The first official documents making reference to “payments in euros or any national Greek currency at the time”  appeared in two tenders at the Municipal Port Fund of Rethymno in Crete, according to Kathimerini.

Our other stories

Today we also have stories on obstacles in Finland’s coalition talks; on Spain’s economic forecasts; what Germany should do about its unions; the importance of the Italicum story; and whether Brexit is more important than Grexit.

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