Euro Watch Greek deal no panacea
Group Economics Macro & Financial Markets Research Joost Beaumont +31 20 628 3437
13 July 2015 • • • • • • • •
Agreement reduces near term Grexit risks, but they remain high Greece made all the concessions, but more to come as this only opens door to ESM negotiations Language on reducing Greek debt burden almost exactly the same as in 2012, so no big concession The biggest risk now is implementation against the background of a deepening recession Parliamentary processes in Greece and other countries will also be difficult 50bn in asset sales not realistic Reduced risk of Greek bank collapse, as ECB will likely increase ELA limit We continue to consider Greece debt crisis or Grexit risks as not being a Lehman moment for Europe
A deal reached, but risks remain high
size is EUR 50bn over the life of the new loan, half of which
Following a marathon session, this morning Greece and its
will be used to recapitalize the banks and the rest will be used
creditors finally reached a deal, which opened the door to
to repay debt and support investment. Another demand is a
negotiations on a 3 year ESM package worth between EUR
strengthening and modernisation of the public administration
82-86bn. The agreement reduces the near-term risks of a
under the auspices of the European Commission (EC). A first
Grexit, although risks of a Grexit remain high. Having said that,
proposal should be submitted by 20 July.
we also continue to consider that such an event would not constitute a Lehman moment for Europe.
As implementation is key, the statement notes that it welcomes that the Greek authorities will submit a request for technical
Long list of measures
assistance from the Institutions, coordinated by the EC.
The statement of the Euro Summit includes a long list of
Interesting in this respect is that the IMF will remain involved.
measures that the Greek government needs to implement. In
Furthermore, the government needs to re-examine earlier
order to rebuild trust, the government needs to ‘legislate
adopted legislation that ran counter to previous agreements.
without delay a first set of measures’. By Wednesday (15 July), the Greek government needs to implement measures to
Minimum requirements
improve the VAT system as well as the pension system, while
Approval of the long list of measures is just a minimum
it should introduce some quasi-automatic spending cuts in
requirement to start negotiations on a new ESM programme.
case the target for the primary surplus will be missed. Finally,
Moreover, the statement stresses that the start of the
the Greek statistical agency (ELSTAT) needs to get full legal
negotiations will not automatically result in an agreement, as a
independence. Furthermore, the civil justice system needs to
lot of number crunching still needs to be done (on financing
be improved and the Bank Recovery and Resolution Directive
needs, debt sustainability, and bridge financing). However, the
written down into the law by 22 July. These are only prior
Eurogroup will meet today on bridge financing, as calculations
actions that need to be met.
show that Greece needs EUR 7bn by 20 July and another EUR 5bn by mid-August.
Looking further forward, the list of measures is much longer, as the Greek authorities need to implement (tougher) reform
Debt restructuring considered later
measures given the worsening outlook for the economy. The
The Eurogroup has serious concerns about the sustainability
measures should include ambitious reforms of the pension
of Greek debt, but will only consider possible longer grace and
system, product markets, energy market, as well as rigorous
payment periods after the successful completion of the first
reforms of the labour market in order to align labour market
review. In addition, it said that nominal haircuts are out of the
policies with international/European best practices.
question. This mirrors language used in 2012, so this is not a
Furthermore, steps need to be taken to strengthen the financial
big concession to Greece.
sector. Privatisation fund The creditors have also demanded that ‘valuable’ Greek assets will be transferred to an independent fund located in Greece. The assets will be monetized through privatisations as well as other means (likely operational proceeds). The target
Risk of near-term Grexit reduced… We think that the deal has reduced the risk of a near-term Grexit, although the risk remains significant. Greece has made all the concessions by accepting the very tough measures, but this only opens the door to ESM negotiations, so more concessions are likely to come.
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Greek deal no panacea – 13 July 2015
banking system to Greece are modest and relatively …but implementation risk very high
transparent. At the same time, we do not think other eurozone
As such, we assess the implementation risk as particularly
member states are in a similar situation to Greece and ready to
high. It will be very difficult to stick to the programme in coming
follow in its footsteps. In contrast, Ireland, Spain, and Portugal
months, given that the economy looks set for a sharp
have left the EU programmes, while their economies are
contraction. This is not the ideal background to be
strengthening.
implementing tough measures. What is more, the implementation will only push the economy deeper into
Authorities to intervene with force if necessary
recession, which will also increase the likelihood that the fiscal
In case of a Grexit, there is a risk that peripheral government
targets will be missed. This, in turn, will probably result in
bond spreads surge to stress levels. However, in that event,
tougher new measures, or heated debates when tranches of a
the European authorities will react with force, limiting the
new aid package need to be paid.
market impact. In the near term, the ECB could decide to step up QE, but if that does not have the required impact, we would
Green light national parliaments also needed
expect the central bank to activate the OMT. QE is skewed
The timeline in the coming days is first for the Greek
towards core government bonds, while the OMT could focus
government to approve the deal as well as to implement the
on ‘unlimited’ purchases of peripheral government bonds. To
prior actions. This already risks that no agreement will be
qualify for the OMT, member states need to be in an ESM
reached in parliament, reflecting strong opposition to the
programme. However, this includes a precautionary credit line,
measures, especially when bearing in mind that the Greek
which has very limited conditions. All this will prevent a Grexit
people voted down a much ‘lighter’ proposal.
from becoming Europe’s Lehman moment.
If agreed by the Greek authorities, attention will shift to national parliaments that need to give their green light. In some countries (e.g. Germany) there is some resistance to the deal, so a green light should not be taken for granted. Having said that, past experience shows that national parliaments tend to approve aid packages that have already been agreed by eurozone heads of states. Target privatisation fund unrealistic We also have doubts by the target amount of the privatisation fund of EUR 50bn. This seems rather unrealistic, also when bearing in mind that the privatisation proceeds in the previous agreement fell also well short of expectations. If the same happens this time, this will not help to reduce the Greek debt as projected, hitting the debt dynamics. Bank collapse prevented The fact that a deal was reached, reduced the risk of a collapse of the banking system. Although the ECB kept the ELA limit unchanged today, it could raise the limit in coming days, if the Greek government sticks to the plans. On Thursday, the ECB will hold a governing council meeting, after which Mr. Draghi can outline the ECB’s view on the Greek deal, also providing more insight in how the central bank will deal with the Greek banks, and the ELA lending in particular. Deal no panacea Overall, we see the deal not as a panacea for Greece and the eurozone. The risks remain significant that Greece will need to (temporarily) leave the eurozone going forward. If true, we do not think that that will be a Lehman moment for the eurozone economy and financial markets. Exposures of the eurozone
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Greek deal no panacea – 13 July 2015
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