Greeks fail to agree on bailout terms – FT.com

Greeks fail to agree on bailout terms – FT.com.

Greek Deadline – Sunday Evening | ZeroHedge.

ekathimerini.com | Merkel has no majority for reported Greek aid, FDP’s Fricke says.

Germany Warms to Extending Greek Aid Deal – WSJ.com.

I try not to make forecasts in my writings. Based on economic conditions and politics, I prefer to create several possible scenarios and maybe engage in some handicapping., but the current Mexican standoff occurring between Greece and the troika is just too juicy for me to resist.

These are the facts controlling each side’s position. Greece cannot be allowed to fail, because it will cause a massive market panic that will make Lehman Brother’s failure look like a Sunday picnic in Central  Park. The politicians will catch all of the blame for this and lose their jobs in the next election.

Greece will default on its obligations if it does not receive the next tranche of loans in November. The country will neither have the money to maintain government spending nor to pay off loans maturing later in the month. If the politicians fail to reach a compromise that releases the loans, then the Greek government will fall, and the current governing coalition members will be exposed in new elections.

Merkel needs the perception that she is being tough on the periphery in exchange for Germany money. German voters are bailout weary, and the politicians are in campaign mode. She will lose votes if she is not being tough on Greece.

The Greek voters resent being a ward of the troika and are tired of being asked for more and more cuts causing nothing but pain as far as they can see. The politicians in the junior coalition parties are playing to this resentment and need to obtain something for their efforts.

This is the status quo between Greece and the troika. Now, they are playing brinkmanship politics, but this is not the first time. The best example of the current situation is the negotiations that took place before the March 2012 bailout. That crisis was resolved, and the end of the world was avoided.

The current standoff will be resolved, too, because the costs of not resolving it are too high. The resolution pattern will be similar to the one from March. Numbers will be fudged, and a face-saving compromise will be agreed to just in time for Greece to receive the money it needs.

If either party could improve its position by maintaining its current position, I would predict otherwise, but this is not the case. If Greece doesn’t receive the loans, it will go bust, and both sides will suffer greatly. Whatever day the Greek government runs out of money, look for a compromise the day before.

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10 thoughts on “Greeks fail to agree on bailout terms – FT.com

  1. “Greece will default on its obligations if it does not receive the next tranche of loans in November.”

    I am not so sure i follow your reasoning here:
    1) No more ECB SMP holdings mature in 2012: http://www.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=498720
    2) Post-PSI bonds only pay a coupon in 2013.
    3) The Greek Treasury is not too far from a primary surplus (which is mostly assured anyway with the new austerity measures).
    4) The only obligations maturing (which will just be rolled over) are T-Bills which are financed through Bank of Greece ELA.

    The next tranche mostly involves funds for the recapitalization of Greek banks, the Greek government is not going to shut down if they are delayed.

    • The Greek government is running way behind on revenue projections. It will not have enough money to keep running at the current level of service.

      Additionally, the T-Bills are being financed by the Greek banks, but those banks in turn are pledging the bills to the ECB in order to obtain the cash to pay for the bills. As part of the troika, the ECB will pull the plug on this backdoor bailout if they cannot come to terms.

      You could be right, though. Perhaps, the November date being thrown around is merely a scare tactic to obtain the loans. At this point, no one knows anything.

  2. Obviously the ultimate decision on the Greek case will be totally political but i ‘m not sure that the troika would risk pulling the plug (especially before the US elections and a Spanish bailout) because the Greek MPs did not approve some very harsh labour market changes. Following the European tradition they ‘d just continue negotiations and ask for a second vote 🙂

    Bank of Greece has a limit on ELA financing of T-Bills but that requires increased outflows throught Target2 or currency demand. As long as the funds are used domestically there’s no increase in the Bank of Greece balance sheet (it only increases for a very brief period) And remember that closing ELA requires a 2/3 majority. That will not be easy to come by, since i ‘m sure that at least the periphery countries would not want such a precedent created.

  3. You’re correct about the number of countries needed to end ELA, but the ECB still holds all the cards. It can unilaterally remove Greek T-Bills from the list of accepted collateral. They have already done this with certain Spanish bank securities.

    Ultimately, I think we agree. There will be some sort of compromise before the proverbial shit hit the fan.

  4. Just a smal correction on your latest reply. The ECB has control of the Eurosystem elidgible collateral list but not of ELA financing. They already do not accept Greek government guaranteed securities in their regular refinancing operations and these instruments are only accepted by BoG. It will require a 2/3 majority for the latter to stop accepting them.

    • “Solvent” is the key, right? The Greek banks are not solvent, which is why they are being bailed out by the latest batch of loans. Furthermore, the documents states that ELA is in exchange for “adequate” collateral. Like all good bureaucratic documents, there a couple of loopholes big enough to drive trucks through.

  5. That’s why Bank of Greece relaxed core capital requirements for Greek banks until the next tranche is released. AFAIK collateral adequacy for ELA is determined by the NCB, not the ECB, although they seem to set limits on specific collateral (limits on T-Bills had to be raised in the summer for the T-Bill auction to pay the ECB maturing bond). In any case we both agree that its ultimately a political decision. Forcing Greece out is politically and legally challenging but it’s certainly difficult to remain in a club where you ‘re not wanted.

  6. Yes, nothing will happen, but we will get close to the edge. The only wildcard I see here is Samaras not being able to get the votes for the new cuts leading to a fall in the government. That doesn’t look likely.

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