Euro Watch
Group Economics Macro & Financial Markets Research Joost Beaumont +31 20 628 3437
Step towards deal but challenges remain 10 July 2015
The Greek government submitted proposals for deal to creditors Proposals include fiscal measures and reforms as earlier demanded by creditors So, it seems that Greek government made significant concessions But we are not there yet, as the Greek parliament still needs to approve the deal… …while creditors still need to agree on debt restructuring, which is crucial for a deal Overall, this is a step towards a deal, but significant challenges remain If a deal is reached, implementation risk will be high
Greek concession
situation’. As such, pressure is building on Germany to
The Greek government seemed to have made a U-turn in
eventually approve some (upfront) debt relief for Greece. But it
order to reach a last minute deal with its creditors. The
remains to be seen whether Germany will give in, as it was
proposals that the government sent to its creditors yesterday
already reported that Ms. Merkel had said ‘no’ to a debt
evening roughly include the creditors’ proposals at the end of
haircut, while she also noted that she cannot predict the
June, which were actually voted down by the Greek people last
outcome for Sunday. As such, Germany keeps a tough stance.
Sunday. As such, it seems that the Greek government has made big concessions to its creditors.
Hurdle 3: National parliaments Assuming that a deal will be reached over the weekend, the
The proposals include VAT increases, pension reforms, as well
next hurdle will be national parliaments. In some countries,
as public administration reforms, aiming to reach a primary
parliaments need to approve the aid package. Most important
budget surplus of 1% of GDP this year, rising to 3.5% GDP by
country in this respect is Germany, as it seems that there is
2018. However, the question is whether this will be sufficient to
some fierce resistance to already providing some debt relief at
convince the creditors, as the outlook for the Greek economy
this point in time. So, there is a risk that the German
has deteriorated significantly recently. Therefore there is a risk
parliament rejects a potential deal, which would imply that
that the institutions will demand that Greece will do more.
Greece and its creditors need to go back to the drawing table.
Indeed, Eurogroup president Dijsselbloem has already
Having said that, past experience shows that national
indicated that the institutions need to look thoroughly at the
parliaments tend to approve aid packages that have already
proposals, with a judgement probably following today.
been agreed by EU heads of states.
Hurdle 1 : Greek parliamentary approval
Hurdle 4: implementation risk
Hurdles remain! The first hurdle that needs to be taken is the
So, although hopes for a deal are rising, it is certainly not a
approval of the proposals by the Greek government. It seems
done deal yet as significant challenges remain. But if we
that there will be some split within the Syriza party, likely
assume that all the above-mentioned hurdles will be taken,
reflecting the fact that the Greek people voted down the plan
there remains a high implementation risk. Greece might find it
last Sunday. This will make it difficult for some members to
difficult to stick to the programme in coming months. The
provide approval now. However, it is likely that the opposition
economy looks set for a sharp contraction, which is not the
parties that were in favour of the proposals will help Syriza to
ideal background to be implementing tough measures. Overall,
get the measures through parliament. Recent news headlines
by kicking the can down the road, it is likely that tensions about
also point in this direction.
Greece will flare up regularly when tranches of the new aid package need to be paid.
Hurdle 2: debt relief If the Greek parliament approves the plan, the ball will be
Market reaction positive
kicked back into the creditors’ courtyards, and that of Germany
The markets responded positively to the news, with equity
in particular. In return for consolidation and reforms, the Greek
markets rising, peripheral spreads tightening, the euro
will demand some form of debt relief. This is crucial to strike a
strengthening, and 10y yields on Greece plummeting. Looking
deal this weekend, but it is a difficult subject in Germany.
forward, we think that the positive market response will remain
However, EU president Tusk said yesterday that a ‘realistic
fairly modest, as the negative reaction to the no-vote was also
proposal from Athens needs to be matched by realistic
muted. Furthermore, even if a deal will be reached,
proposal from creditors on debt sustainability to create win-win
uncertainties remain.
2
Step towards deal but challenges remain – 10 July 2015
September 2013
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