Is the EZ’s “cunning plan” for Greece credible?

The meeting of the EZ finance ministers next Tuesday (20th November) to “settle” on a deal for Greece is certainly a “must be watched “event. The market consensus suggests that some kind of deal will be done. Well, that may be the case, but let me just raise the following.

• The current “cunning plan” being hatched up by the EZ is to allow Greece 2 more years to achieve its budget targets – which we all know Greece will never deliver on – after all, why destroy a perfect record of non compliance;

• It is true that the Greek Parliament passed the bill which approved further austerity measures and, in addition, the tougher budget. Well that the plan, but what about delivery boys and girls. However, there is rebellion in the air. Today, Greek press state that a junior coalition member has announced that it will oppose the labour reforms demanded by the Troika (the EU/ECB and the IMF);

• Allowing Greece a further 2 years will require the EZ to provide more bail out money (around an extra E30bn+) for the country – a close to impossible proposition, for the Dutch, Finnish (probably Slovaks – but the EZ does not really care about the Slovaks) and, the German’s, though recent comments by the German’s suggest that they may be rethinking – certainly been raised in the German press as an option, though I find this hard to believe;

• Germany, Holland and Finland need to obtain Parliamentary approval of any deal – not at all assured, especially as all three countries are becoming more euro-sceptic, especially Finland and Holland. Mrs Merkel is facing a growing number of dissenters from her own coalition – the last time around, she needed the support of the opposition to pass through the legislation which established the EZ bail out fund, the ESM;

• The Troika has not issued its final report – no great surprise (though, as usual, the contents of the draft report have been well leaked), as the EU/ECB is at odds with the IMF over the crucial issue of debt sustainability. The IMF (Mrs Lagarde) stated publicly (indeed contradicted Mr Juncker, the head of the EZ finance ministers – he’s the guy who came out with the classic line, namely that it was OK for politicians to lie – at last weeks Press Conference) that Greek debt to GDP must not exceed 120% by 2020, whereas the EZ are trying to extend the deadline to achieve the 120% level to 2022. Just to be clear, there is no rational basis as to why a 120% threshold should be considered as the maximum level possible for debt sustainability purposes – in reality, the 120% level was chosen (together with the IMF) as it just happened to be the debt to GDP percentage of Italy, at that time, the highest in the EZ. Furthermore, the EZ forecasts will have been, almost certainly, pretty optimistic and the reality is that Greece will perform much worse and, in addition, will be light on delivery – as they always have been. However, even these reports suggest that Greek debt to GDP will increase to over 190% in the interim period, with Greek GDP declining by some 25%, since the crisis began;

• We all know that Greece will NEVER repay the funds already lent to them. As a result, a haircut is necessary, though politically impossible for the EZ, in particular, Germany to accept at this time, as Mrs Merkel has “assured” the German public that there will be no losses on bail out funds !!!! and she faces a general election next September. Further funding will just make the haircut, which everyone knows is coming, larger. I’m amazed that EZ taxpayers – the guys who will pick up the eventual tab, don’t storm their governments and demand a rethink;

• The Greeks report that they need the next tranche of bail out funds asap, or else they cannot pay their bills. In reality, the Greeks always cry out for more and more cash but, at the end of the day, manage to continue for a while longer;

• The political situation in Greece is, lets just say, fraught. The main opposition party (Syriza, who is recommending that Greece defaults and, according to the most recent polls have the support of 30.5% of the population – which by the way would make it the largest party in the Greek Parliament if an election was called today) is gaining yet more support, as is the extreme right wing (basically a Nazi) party. Social disorder is ever rising – not a healthy environment. The current coalition, which had 179 seats in the 300 seat Parliament, now just has 167 seats, as defections continue from those opposed to further austerity measures and reforms. Essentially, the current coalition is far from being stable;

• Mrs Merkel faces a general election in September next year and wants to kick the can down the road until after this date – is that likely/possible, given we are talking about Greece. Me thinks not;

• Current proposals, in addition to the 2 year extension for Greece to meet its targets, include (a) a reduction in interest rates (down to zero?) on funds provided and to be provided to Greece – very likely (b) a transfer of “profits” on the ECB’s holding of Greek bonds, which it bought some time ago – back to Greece, thereby reducing Greece’s debt to GDP. However, Mr Draghi stated that, following this transfer of “profits”, the ECB was “done” with Greece ie over to you politicians – I’m out of here. However, once again, a very likely option (c) “extend and pretend” and “fiddle the books” type schemes, certainly the usual “cunning plan” of the EZ, but with the IMF there, who are not playing ball, difficult (d) giving Greece all the funds already approved in one go – probably the stupidest thing that the EZ can do, given the propensity for the Greek’s to ensure that money “disappears” – however, likely, though I really do hope the EZ make arrangements to stop the greatest heist from happening, by insisting on some controls/supervision and (e) debt buy backs at the discounted levels that such Greek debt is trading in the markets, so as to reduce Greece’s overall debt to GDP – possibly, but will not make enough of a difference. No doubt other pretty hairy schemes will be raised – after all, the EZ has moved firmly into Alice in Wonderland country;

• The IMF (Mrs Lagarde) is to attend next Tuesdays EZ finance ministers meeting. Mr Rehn, a senior EU official, has stated that the EZ needs the IMF to continue to participate (in terms of handing over money to Greece, in addition, to overseeing its “rescue”) Hmmm. Mrs Lagarde, on Friday, stated that it was not all over “until the fat lady sings”, suggesting to me that she will press the IMF’s position – in any event, I cant see how she can back off a publicly stated position, given the IMF’s international standing. Furthermore, the IMF, unlike the other EZ countries, has “preferential creditor status”, which means that it will get its money back, though the haircut on the EZ countries, which have provided Greece with funds, will be even larger as a result. Oh dear!!!.

OK, so how does the EZ sort out this awful mess. I have to say that whilst virtually every commentator/analyst tells me that this will be sorted out next Tuesday and, furthermore, ratified by the Parliaments of those EZ countries that need to obtain such approval subsequently (by the end of November), I am far from sure that this is the “shoe in” that people think. I do not underestimate Mrs Merkel and her ability to force through measures which she deems important and providing further funds for Greece, at least until her next general elections in September next year, is certainly her goal – indeed an increasing priority for her. However, the more the “fiddling” and “extend and pretend” type games, the greater the complexity. History is littered with examples where, in these situations, a normally totally unexpected event, just blows these kinds of “deals” to pieces.

Interestingly, on Friday, the Dutch Prime Minister, Mr Rutte, stated that if agreement could not be reached on Tuesday, a further meeting would be called in January !!!!. I have found that, above all, Holland is the most rational and practical of all the EZ countries.

Well lets wait for next weeks episode. This stuff makes reality TV seem totally boring and unexciting. You could not make this stuff up – if you had, everyone would tell you that the script lacked credibility and would never happen in the real world.

Welcome to the EZ.

Kiron Sarkar

17th November 2012

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