So say Greek officials talking to Reuters
Despite a loosening of restrictions on foreign transfers by businesses last Friday the cash problems at the banks are unlikely to be resolved any time soon
“The banks are in deep freeze but the economy is getting weaker,” said one official, pointing to a steady rise in loans that are not being repaid.
Delays to the next round of bailout talks aren’t going to help either as the longer they take the more critical the banks’ condition becomes as a €420 weekly limit on cash withdrawals plays out on the economy and borrowers’ ability to repay loans
Greek officials, alarmed by a downward spiral in the economy, want an urgent release of funds for their banks.
Four big banks dominate Greece. Of those, National Bank of Greece, Eurobank and Piraeus fell short in an ECB health check last year, when their restructuring plans were not taken into account. The situation is now dramatically worse.
Former Greek finance minister Yanis Varoufakis has said that the economic reforms Greece has signed up to are “going to fail” ahead of talks on a third bailout for the cash-strapped country.
He told the BBC that the medicine administered to the Greek economy by its so-called “troika” of creditors – the European Union, the European Central Bank and the IMF – will “go down in history as the greatest disaster of macroeconomic management ever”.
“This programme is going to fail whoever undertakes its implementation,” he said.
Varoufakis was dubbed “the rock star finance minister’ by the media as took the world by storm during the Greek debt negotiations. He’s been pictured wearing a leather jacket to meetings with important officials and he rides a motor bike.
However he resigned from his role despite a “no” vote in the Greek referendum saying that Eurozone officials would prefer his “absence from its meetings”.
In her euro-hegemonic role Germany failed to properly handle the Greek Crisis. What economics have been whispering among themselves after the scandalous Brussels Agreement of July 13th is now on the public discussion. One of IMF’s former European bailouts official, Ashoka Mody made it very clear in his article on Bloomberg on Friday morning: It’s Germany not Greece that has to leave the eurozone.
Germany not Greece should Exit the Euro
“The latest round of wrangling between Greece and its European creditors has demonstrated yet again that countries with such disparate economies should never have entered a currency union. It would be better for all involved, though, if Germany rather than Greece were the first to exit.
After months of grueling negotiations, recriminations and reversals, it’s hard to see any winners. The deal Greece reached with its creditors — if it lasts – pursues the same economic strategy that has failed repeatedly to heal the country. Greeks will get more of the brutal belt-tightening that they voted against. The creditors will probably see even less of their money than they would with a package of reduced austerity and immediate debt relief.”
Now the idea of a member country exiting the eurozone is not a taboo anymore. But would Greece leave the euro, it will be “possible followed by Portugal and Italy in the subsequent years, the countries’ new currencies would fall sharply in value, leaving them unable to pay debts in euros, triggering cascading defaults. Although the currency depreciation would eventually make them more competitive, the economic pain would be prolonged and would inevitably extend beyond their borders.
The new recapitalization procedure for Greek banks will follow the model used successfully in 2012, with the separation and liquidation of unsustainable lenders and assets, thereby putting an end to households’ and enterprises’ fears of an across-the-board haircut on deposits.
Monday’s preliminary agreement for a third bailout provides for the investment of up to 25 billion euros in the second recapitalization of Greek banks in three years, while the government must immediately incorporate the European Union’s 2014 directive regarding the streamlining of banks in national legislation. The directive provides for 8 percent of the banks’ needs to be covered by the banks themselves: first by their shareholders, then by bondholders and if that is not enough, by those with deposits of over 100,000 euros.
Therefore, while the directive does introduce a bail-in process, deposits up to 100,000 euros per depositor per bank will be shielded from a haircut – i.e. the vast majority of households’ accounts.
To be sure, Germany has dug its heels in on Greece over the two weeks since PM Alexis Tsipras decided to put creditors’ proposals to a popular vote.
Even before the referendum hardened Chancellor Angela Merkel’s position, German FinMin Wolfgang Schaeuble and a whole host of Berlin lawmakers were up in arms at what they viewed as excessive accommodation of an increasingly belligerent beggar state. Even Bundesbank chief Jens Weidmann spoke out, deploring the ECB’s permissive attitude towards Greek banks and accusing Mario Draghi of monetary financing.
Regardless of whether Greece comes away with a third bailout after Saturday’s Eurogroup meeting, no one can say Germany didn’t drive a hard bargain and indeed, Berlin has stood firm in the face of IMF calls for Greek debt writedowns even as Christine Lagarde’s haircut demands were bolstered this week by the US Treasury itself.
Germany’s position was summed up nicely on Friday by Hans Michelbach, a German lawmaker from Chancellor Angela Merkel’s Christian Social Union Bavarian sister party who told Bloomberg that “there must be no consent to a ponzi scheme, where old debts are settled only through new debt and the Eurogroup faces the same problem of Greece’s debt sustainability again in 2018.” “I’m not sure that the creditors won’t be fooled again because so far all implementations have been questioned again repeatedly,” he added.
We’re sorry to break it to Mr. Michelbach, Frau Merkel, and the German taxpayer, but that €53 billion Greece is asking for will be just the start of things and we don’t mean in the sense that Athens will one day in the not-so-distant future be back in Brussels looking for a fourth bailout (which they probably will), we mean in the sense that Greece’s beleaguered banking sector is insolvent and will need to be recapitalized one way or another with some (or all) of the funds coming directly out of the pockets of the very same EU taxpayers that are now set to fund the third Greek sovereign bailout. As Reuters reports, the recap could well run into the tens of billions of euros:
Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday.
The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.
A Greek bail-in could resemble the rescue plan agreed by Cyprus in 2013, when customers’ funds were seized to shore up the banks, with a haircut imposed on uninsured deposits over €100,000.
It would be implemented as part of a recapitalisation of Greek banks that would be agreed with the country’s creditors — the European Commission, International Monetary Fund and European Central Bank.
“It [the haircut] would take place in the context of an overall restructuring of the bank sector once Greece is back in a bailout programme,” said one person following the issue. “This is not something that is going to happen immediately.”
Alexis Tsipras will accept all his bailout creditors’ conditions that were on the table this weekend with only a handful of minor changes, according to a letter the Greek prime minister sent late Tuesday night and obtained by the Financial Times.
The two-page letter, sent to the heads of the European Commission, International Monetary Fund and European Central Bank, elaborates on Tuesday’s surprise request for an extension of Greece’s now-expired bailout and for a new, third €29.1bn rescue
Although the bailout’s expiry at midnight Tuesday night means the extension is no longer on the table, Mr Tsipras’ new letter could serve as the basis of a new bailout in the coming days.
Mr Tsipras’ letter says Athens will accept all the reforms of his country’s value-added tax system with one change: a special 30 per cent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained.
On the contentious issue of pension reform, Mr Tsipras requests that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He also requests that a special “solidarity grant” awarded to poorer pensioners, which he agrees to phase out by December 2019, be phased out more slowly than creditors request.
“The Hellenic Republic is prepared to accept this staff-level agreement subject to the following amendments, additions or clarifications, as part of an extension of the expiring [bailout] program and the new [third] loan agreement for which a request was submitted today, Tuesday June 30th 2015,” Mr Tsipras wrote. He added:
According to a copy of the letter sent to the ESM and Jeroen Dijsselbloem, the Dutch finance minister who chairs the committee of his eurozone counterparts, whichwe’ve posted here, the loan request is for €29.1bn to cover debts maturing into 2017.
That would seem to be a pretty traditional bailout request. But it also contains some untraditional demands that may be difficult for creditors to accept. Below is an annotated version of Tsipras’ letter:
Dear Chairperson, dear President,
On behalf of the Hellenic Republic (“the Republic” or “Greece”), I hereby present a request for stability support within the meaning of Articles 12 and 16 of the ESM Treaty.
The ESM treaty is the law that now governors all eurozone bailouts. It wasn’t in place for either Greece’s first or second bailouts, but it would set the terms for its third. Articles 12 and 16 simply state the purpose of a bailout programme: to “to safeguard the financial stability of the euro area as a whole and of its Member States.” Unfortunately for Tsipras, Article 16 also happens to mention that a new programme must include a new “MoU” – or memorandum of understanding, a phrase that is politically poisonous in Greece.
As you are aware, the Republic faces urgent and pressing financial problems in the second half of 2015 and for the whole of 2016 given that:
- no disbursements from its second program (the “Program”) have been made since July 2014;
- the Republic does not have access to market financing within the meaning of Article 1 of the Guideline on Loans (“Guidelines”) by the European Stability Mechanism (“ESM”);
- the Program expires on 30 June 2015, and our application for an extension to conclude the pending negotiations has not been accepted; and,
- the Emergency Liquidity Assistance (“ELA”) has not been extended by the ECB, and therefore, capital controls in the Greek financial system were necessary to maintain the financial stability of the Euro area.
Some fans of the Greek ruling coalition argued that it had become increasingly intransigent over recent months to pave the way for a default and/or Grexit, that it was not simply playing a game of chicken with its creditors but was working to create a set of conditions that would force a radical rupture in a way that it could tell voters that it had clean hands.
This 11th dimensional chess theory of Greek negotiations appears to be invalid. Both the Guardian and the Wall Street Journal are separately reporting that members of the Tsipras government are working on plans that amounts to capitulation on the most contested creditor demands: that of pension and labor market “reforms,” as in large pension cuts and changes to market regulations that reduce worker bargaining power.
Now it may turn out the Syriza offer is deemed to be too small, too deferred, and/or too cosmetic to satisfy the Troika and the European governments that must approve any bailout extension (we are now so close to the expiration of the second bailout on June 30 that it is now too late to get a deal approved by then. But since IMF chief Christine Lagarde has 30 days before she has to report a Greek non-payment of €1.5 billion on June 30 to her board, the real drop dead date appears to be July 20, when a €3.5 billion payment is due to the ECB). And since the Syriza cabinet is apparently hashing out details now, any media reports are on discussions in progress, and not a final plan.
Note that Tsipras has yet to sign off on a proposal key members of the government are devising. However, note that they would not be working on a proposal to, as the IMF demanded, “make the numbers work” without a go-ahead from him to try to close the gap. And also remember that last week, in a proposal the Troika rejected, Greece agree to meet their primary surplus demands of 1.0% of GDP this year, rising to the insane level of 3.5% by 2018 and thereafter. Last week’s plan from Greece was kicked back because the Greek negotiators freely admitted their reform proposals failed to meet those levels. Read More
The International Monetary Fund is maintaining its tough line on Greece
Here are three big points to come out of today’s regular press briefing by IMF spokesman William Murray.
The fund still doesn’t like the idea of an interim deal and is still insisting that Greece needs to reach a “comprehensive” solution with its creditors. “We cannot conclude the review based on a few measures. It needs to be comprehensive,” Murray told reporters.
The IMF does not want to talk – in public at least – about the possibility of a third bailout, or program, for Greece. “It’s way too early to talk about third programs. We are focused as you know on completing the current review,” Murray said. Which, of course, makes sense. The IMF has taken plenty of grief from shareholders and both internal and external critics over its work in Greece. So it’s not in a hurry to extend its presence there…
Greece can buy some more time if it wants to on its payments to the IMF. Athens owes the fund Euro1.5bn in four separate payments in June. But because it has multiple payments in the month it can choose to “bundle” those, Murray told reporters, and pay them all in one go on the final day of the month. The rule has been in place since the 1970s but is rarely used. The last country to invoke the rule was Zambia in the 1980s, according to Murray. Athens has not made any request to bundle its payments yet. But “they are entitled to do that if they want”, Murray said.