April 17, 2015

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Another deadlock in reform talks

The talks between Greece and its creditors have moved to Washington, and they are going from bad to worse. Kathimerini writes that talks are effectively deadlocked and EU officials even expressed doubt that a deal is possible until May 11. 

We were struck by Christine Lagarde's tone during her press conference. We were not surprised as such that she rejected a payment delay, but that she appeared to reveal that Yanis Varoufakis had asked for one. We don't know, of course, what he said to her and the Greek finance ministry officially denied it. But we know what she said yesterday:

"As you know, Greece is one of our debtors so we are concerned about that. We have been able to express and explain the policy of the IMF in terms of payment delays and give the precedence and history about that to Mr. Varoufakis."

In response to an earlier question, she said the IMF had bad experiences with payment delays which were granted to two developing countries with poor results. There has never been an advanced country that asked for a payment delay. She considers a payment delay to be additional financing granted to the country. 

Then she said this about what Greece should now do.

"My advice is to get on with the work and the work needs to address both the short term and the medium term of the economy. The objective that we all pursue is to actually restore the stability of the Greek economy, but it is not done by a political, last-minute accord. It is done by actually looking at measures, committing to reforms, measuring what the outcome will be. It is the tedious work of Financial Ministers, wherever they are, and the lenders." 

Greece needs to pay €1bn to the IMF in May, out of the €9.2bn of total repayment to the IMF this year. Even if it manages to pay the May rates, others will be due later throughout the year, and together with the ECB repayment of about €7bn in July and August it suggests that the funding situation will remain critical.

The prospect of getting funds from the bailout programme though seems more distant than ever. Even representatives of the European Commission appeared to be losing their patience. In comments on Thursday spokesman Margaritis Schinas said the EC was “not satisfied” with the level of progress in talks and called for work to “intensify” ahead of next week’s Eurogroup summit.

Alexis Tsipras, in a statement to Reuters, said he was "firmly optimistic" and listed all those areas where agreement has been reached, including tax collection, corruption and distributing the tax burden towards those who are most able to pay. But he also acknowledged that the two sides disagreed on four major issues: labour rules, pension reform, a hike in value-added taxes and privatisations, which he referred to as "development of state property" rather than asset sales.

"Despite the cacophony and erratic leaks and statements in recent days from the other side, I remain firmly optimistic that there will be an agreement by the end of the month. Because I know that Europe has learned to live through its disagreements, to combine its parts and move forward."

He said he was confident Europe would not "choose the path of unethical and brutal financial blackmail" but instead opt for "the path of bridging differences" and "stability".

Yanis Varoufakis at Brookings Institution gave no signal about a softening in the negotiation stance either. Instead he defended the Greek strategy: “We have the right to be heard, and we have the right to challenge the logic of a programme that has clearly failed.” There was a lot of lecturing from his side citing overly optimistic forecasts, too much austerity, and eurozone's design fault as reasons for the current situation, saying that the historical record will show that there was no real solidarity (the Greek state never really got bailed out) and that the reform programme was wrong. He also defies suggestions that 2014 figures showed a recovery in the economy. No clues were given on how exactly the Greek government wants to move forward. Most indicative was probably what Yannis Koutsomitis pointed out (@YanniKouts) quoting Varoufakis saying: "We wish to merge the current review with the June agreement." 

Macropolis says the government has no clear strategy. It is not clear about what will happen if the deal will fall through, a likelyhood that is increasing by the day but completely denied from the Greek side. The two options in discussion - snap elections or referendum - have no across-the-board support inside the Greek government. In a recent Pro Rata opinion poll a referendum was the most favoured option for all parties except New Democracy and To Potami. But a referendum would be risky for the government and capital controls would have to be installed, the article warns.

However there is some surprisingly good news coming from the data, though not all of it convincing. 

The IMF forecast for Greece surprised economists and the ECB with an optimistic 2.5% growth rate for this year and 3.7% next year. Even the internal analysis of the IMF and its representative Poul Thomsen were less buoyant. The FAZ asks whether the IMF were politically motivated to cover up internal differences by an optimistic set of growth forecasts. Even the Greek government only expects 1.4% this year and this also seems optimistic given the prolonged uncertainty. S&P expects the economy to shrink 1.5%. The FAZ article says in 2012 the IMF already underestimated the recession only to end up with a debt restructuring in the end.

Macropolis reports that the latest budget execution data is beating targets. Expenditure was lower and revenues higher in March, mainly due to rearrangements in cash projections, compensating for budget execution falling behind. The monthly data showed revenue (before tax refunds) exceeded its target by €491m and primary expenditure was €589m lower than the target.

Last night the Greek ten-year yield was at 12.73%, up 0.63bp.

Our other stories

Today we also have commentary on new solutions to the Greece crisis; a preview of the Finnish elections; Portugal’s fiscal strategy; why Germany is running surpluses that are too large – even for its own framework; and a high level political arrest for money laundering.

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