Tuesday 21 August 2012

Brot und Bratwurst for Greek PM?

For gree version click on Kerdos

Samaras in Berlin

Greek Prime Minister Mr Samaras is on his way to Berlin for some brot und bratwurst with chancellor Merkel. Apparently Merkel would provide the sausage while Samaras the condiments. He is bringing promises for more than 13billion worth of cuts.
It took the Greek government around 2 months to agree on what to cut and from where to find the money. One would have thought that given the gravity of the situation and the real danger of Greece going bust the sense of urgency would have been more acute. But hey, summer is sacrosanct. The truth is that Samaras is just a coalition Prime Minister and to get more than two Greeks to agree is by itself a big order. Nevertheless, it seems that the technocrat Finance Minister Mr Stournaras managed to do it. He very possibly threatened to resign few times just to wake up Mr Venizelos and Mr Kouvelis, the other two coalition partners from their coma. 
In return for the cuts Mr Samaras we are told is going to ask for the Greek Bank recapitalization to happen as in Spain. That apparently would reduce the Government debt burden by 50billion. Then he also wants to get some time extension on the applicability of the measures.

One should not doubt the sincerity of the Greek PM when he says that this time Greece would keep its promises. The problem in Greece was never the intentionality but the implementation. It is perhaps for this reason that the package includes 13.5billion of cuts with the aim of achieving the 11.5billion that have been requested by Europe.

Can Greece deliver this time?

Not easy to say, but if the Greeks get more than 70% of the work done then they would have shown the ability and commitment. For this though they also need Germany’s help. Germany and Merkel has to show some leniency here in order to boost Samaras’s chances of surviving the year as PM. My guess is that Merkel would give something back in order support the Greek government.

No Messing with US elections

Why should Germany do this? The answer is easy. Troika’s evaluation of the package that would eventually release or not the next tranche of money would come towards the end of September. Assuming that it is negative, then chances are that Greece would fall back into crisis with possible loss of Government. This is really bad timing as the US elections are round the corner. I am sure no European politician would like to get on the bad side of Obama just weeks before the elections.

Can Greece default?

Almost daily we read about Greece defaulting. The people that write or speak about Greece defaulting probably do not understand the meaning and technicalities of default. Let me explain. Following the PSI, Greece has around 65billion of debt in Bond form that is traded freely in the markets. These 65billion (nominal) carry a coupon of 2%. Thus in order to keep on servicing these bonds Greece needs 1.3billion a year. Redemption is far into the future. In addition, these bonds trade at around 15-18% of their nominal. The rest of the Greek government debt is in loan form with the European countries. If Greece decides to stop paying them then it is not an event of default unless the counterparty wishes to call it. As it is a loan most probably it would be restructured. ECB still owns around 45billion of Greek bonds but these are serviced through an escrow account by Europe who then adds them to what Greece owes.
Given this, it would be suicidal for Greece to stop paying their obligations on the English law publicly traded bonds.
So what if Europe decides not to give any more money to Greece. In this case Greece would need to find enough cash to fund the primary deficit gap. They can do so by passing emergency executive orders. Greek banks are supported already by the Bank of Greece ELA so unless the ECB orders this to stop they can continue doing so.
Put it another way, default is not really an option. More likely it would be full blown exit from the Eurozone, which currently seems to be delayed at least after the US elections and possibly the new year. But even if Greece decides to exit the Euro it is in their interest to keep servicing the English law bonds. After all the idea would be to access the markets again, not shut themselves out.