While progress is being made here, it is not the right type. No one ever thought that the Eurozone would fail to create a plan amongst its members to kick the Greek can further down the road. The main issue is that the IMF is insisting that the troika adhere to the original debt reduction target, 120% of GDP by 2020.
The German-led Eurozone has run out of fudges. Time is money, and by delaying Greece’s restructuring program a €44bn funding gap has emerged. This shortfall must be filled in order to keep Greece on its debt restructuring timetable.
The problem is that the Eurozone and ECB will have to take a write-down on its debt in order to reach the target. German Finance Minister Wolfgang Schaeuble has decided that this would be “illegal” because it amounts to the financing of a fellow Eurozone member.
The ECB’s bond purchases under the SMP and soon to be activated OMT are financing of governments, too, but this fact has not stopped either program. What is illegal is a matter of convenience for the northern tier.
The issue here is that these governments, particularly the Germans with an upcoming elections, do not wish to withstand the fallout from throwing more money down the Greek hole. Hence, the one method that would assure a sustainable path is summarily rejected by the northern tier in favor of more gimmicks.
A new idea being floated by the Germans is another private sector cram-down. I would argue that taking private investors money via a “voluntary” buy back of their bond holdings at “market” value would be illegal, but the Germans do not see it that way.
Recall that the Greek bailouts so far called for voluntary participation, which was anything but. ISDA would eventually determine that participation was not voluntary creating a default event triggering credit default swaps. It looks like we will travel that road again.
The larger problem with a voluntary exchange is that speculators now see European money on the table. In response, they will begin purchasing Greek bonds, and this action will bid the price up so that the Greece’s realized savings shrink. This money will have to made up somewhere.
Even if the Eurozone agrees to the latest can kicking exercise, the IMF still has to approve the new plan. Complicating the picture is that its emerging market shareholders believe, and rightly so, that the Europeans are being treated with kid gloves and that the developing countries would never have been allowed to get away with multiple bailouts and a very generous sustainability goal.
The IMF will have to stick to its guns here, and it believes that without debt relief Greece’s debt to GDP ratio will reach 150% by 2020. There is no deal without the consent of the IMF, despite what the FT writers think:
AN emergency meeting of the government’s Christian Democrat supporters in the German parliament has been summoned for 8.30am Wednesday to discuss the Greek rescue package, in an indication of government confidence in reach a deal on Tuesday evening.
Look for the Eurozone to agree to a deal amongst its members, which the IMF will refuse to approve. The 4th Iron Law of the Eurocrisis will be put into play— nothing ever gets done without creating a crisis first.
The brinkmanship will continue for several weeks until Greece is just about to run out of money. By this time, gyrating markets will give Merkel the fear she needs to ram the IMF deal through the Bundestag.