With China’s markets on vacation today and tomorrow, you may have a spare neuron or so to devote to this morning’s news from the European Central Bank.
Growth will be slower than expected, the bank said. Inflation may turn negative in 2015. And the bank adjusted some of its rules so that it will be able to complete its full 1.1 trillion euro ($1.2 trillion) program of quantitative easing. Stimulus will continue to September 2016 or beyond, central bank president Mario Draghi said.
European stock markets apparently liked the promise to keep buying bonds and to further depress the euro more than they worried about lower economic growth. The German DAX index closed up 2.66% and the French CAC index was ahead 2.17%. The euro itself closed at $1.1101 after touching a two-week low at $1.1087 during the trading session.
The biggest news in Draghi’s update of the EuroZone’s economic outlook was a forecast that inflation in 2015 would finish, most likely, at an average of 0.1%, and that it might well turn negative for the year. That’s a long way from the central bank’s goal of raising inflation to 2% and leaves the central bank about where it was in the inflation battle when it started its $1.2 billion program of quantitative easing. In what seems to me a transparent effort to put a good face on that inflation news, Draghi pointed out that even if inflation turned negative for 2015, it wouldn’t actually be deflation since the negative effects of lower oil prices are likely to be transitory. For 2016 the bank is predicting an increase in inflation to 1.1% and then to 1.7% in 2017. Do note that even the 1.7% for 2017—two years from now—is below the central bank’s 2% target.
A cheaper euro would ordinarily produce higher economic growth in Europe’s export-oriented economies, such as Germany, Finland, and the Netherlands, as consumers who buy in something other than euros see the price of the goods they purchase fall in their own currencies.
But the euro getting cheaper in dollar terms in a global economy where growth, especially in China is falling, and where we’re on the verge (if we’re not already in the midst of it) of a round of competitive currency devaluations following on China’s recent move.
It’s hard to see how today’s news from the European Central Bank doesn’t lead to even more stimulus from the bank in the not too distant future. And it’s perhaps even harder to see how more stimulus turns the EuroZone into an engine of growth absent an improvement in China’s economy.
Well, that didn’t take long.
Hours after the early Monday morning agreement on an agreement, the plan for a third Greek bailout program and bridge loan had started to come apart. The obstacles could sink the possibility of any deal—if the parties raising a ruckus aren’t willing to compromise.
Perhaps surprisingly given how harsh the agreement to agree is on Greece, the big problems aren’t coming from Athens. It looks like the Greek parliament is set to vote its approval of all the terms creditors demanded before they would sit down at the table to hammer out a bailout program. Prime Minister Alexis Tsipras could well lose a the support of enough of his own Syriza party to force him to form a new coalition government with opposition support, but polls show that 70% of Greeks want parliament to vote yes, and that 68% of voters want Tsipras to stay on as Prime Minister even after any changes to the coalition.
No, the problems are coming from outside Greece—and they’re coming from just about every direction.
A new sustainability report leaked this morning from the International Monetary Fund projecting that the proposal plan will continue to eat away at economic growth in Greece and that Greek debt will peak at 200% of GDP. The report raises the issue of the sustainability of the bailout program. That’s a crucial issue since the IMF is not allowed to extend financing if it doesn’t think it will get the money back. With the 16 billion euros of the 86 billion proposed bailout program projected to come from the IMF, a finding that Greece isn’t sustainable under this plan would blow a huge hole in the agreement to agree. A potential solution would be to provide enough debt relief for Greece that the country’s debt load becomes “sustainable.” That, of course, runs head on into objections from EuroZone governments that oppose any debt relief. Reprofiling—that is extending the term of Greek debt—instead of cutting the amount that Greece owes would require, the IMF projects, extending the maturity of Greek debt for 30 years. Another possible solution would be for some individual country to lend Greece the money it needs for a bridge? Any names spring to mind? (Send suggestions to Alexis Tsipras, Office of the Prime Minister, Athens, Greece.)
The agreement to agree envisions that a short-term bridge loan to let Greece pay the European Central Bank the 3.5 billion euros due on July 20 would come from the European Financial Stability Mechanism set by the European Union in the wake of the global financial crisis. The rules of the EFSM would seem to preclude using the money for EuroZone rescues. The United Kingdom, Denmark, and Sweden, members of the European Union but not of the EuroZone have already objected to this use of EFSM funds.
At least seven other parliaments need to approve the Monday agreement to agree, including Germany, Netherlands, Slovakia, Austria, and Finland. Despite the volume of protest against sending any more money to Greece in Germany, Chancellor Angela Merkel looks like she has the votes to win on the Bundestag on Friday. Finland, however, could throw a spanner in the works. The euro skeptic True Finns party, a member of the current coalition government in Helsinki, opposes extending any more bailout money to Greece and has threatened to bring down the government if it pushes ahead with the plan. Even though the True Finns saw enough success in April elections to increase the party’s clout in government (it’s leader Timo Soini is now foreign minister) I think the party will stop short of fulfilling its threats and there are, unfortunately time-consuming, ways of avoiding any EuroZone country being able to exercise a veto on the bridge loan or final program. The real danger here is that a Finnish “No” would bring out No votes in other EuroZone members such as Slovakia and the Baltic nations.
The problem, in my opinion, isn’t the ultimate approval of a third bailout program—that will eventually get worked out—although I doubt that this program will solve the Greek crisis. And it isn’t the ultimate approval of a bridge loan—that too will get worked out eventually. The issue, though, is whether or not the EuroZone can demonstrate enough near term progress to enable the European Central Bank to keep funding Greek banks and whether or not the EuroZone can work out a bridge loan before the July 20 deadline for Greece to make another payment to the ECB.
What a horrible …. I was going to say deal, but the agreement reached early this morning to avert, at least temporarily, a Greek exit from the euro isn’t really a deal.
It’s only an agreement to begin negotiating a third bailout program once the Greek parliament has passed into law—by the end of day Wednesday–creditor demands on changes to the country’s VAT and pension system. Then, again, before there’s an actual deal, the parliaments of at least five countries—including Germany and Finland, two of the biggest opponents of a new bailout program for Greece—have to vote to open negotiations.
In other words, this could all still come apart—although the fact that German public opinion in today’s polls is in favor of the tough position laid out in talks by Germany finance minister Wolfgang Schaeuble is a good sign that German Chancellor Angela Merkel will be able to keep her allies in line. And there’s a good chance that Prime Minister Alexis Tsipras will win a vote for the agreement in the Greek parliament—even if only at the cost of the fall of his own government.
But let’s assume that the agreement to begin negotiating passes and that talks on turning this morning’s bullet points into a deal begin.
Then, we’ll be looking at a truly horrible deal.
The Greeks did indeed win a few points. The proposed deal would include more money—86 billion euros ($95 billion) in bailout loans instead of the 7.2 billion euros in original talks—and more time—years instead of months.
But the goal of limiting new austerity measures on which Syriza ran and won power in Athens is a smoking ruin. Greece will have to implement roughly 13 billion euros in spending cuts/new taxes and has agreed that if the government doesn’t meet goals for a primary surplus (that’s the budget surplus before interest rate payments) the national budget will be subject to automatic spending cuts.
Greece will have to submit to a humiliating hit to its sovereignty. Experts from the Troika—the International Monetary Fund, the European Commission, and the European Central Bank (one Syriza election promise was to keep the Troika out of Athens)—will be in Athens, not just to monitor progress on the bailout program but also to review all draft legislation before it is submitted to the Greek parliament. In addition, the Troika will rule on all legislation already passed that had not been agreed ahead of time with creditors and send it back to parliament for amendment.
And then, of course, there’s the new EuroZone entity that will take control of privatization efforts to sell 50 billion euros of Greek government assets. The Greek’s did succeed in getting that entity headquartered in Athens rather than Luxembourg and in having half of the proceeds used to recapitalize Greek banks with the other half split between investment in Greece and debt repayment, but it’s hard to imagine a more “in your face” demand than one passing control of national assets to a group controlled by “foreigners.
The biggest problem with the deal, if there finally is a deal, is that the EuroZone has forced Greece down this road before and there is no reason to think that tax increases and cuts to government spending will stimulate growth in the Greek economy. If the definition of insanity is doing the same thing over and over again and expecting a different result, then this program is insane. This is a recipe for a contracting economy in Greece that will require more austerity that leads to even more of a decline in the Greek economy. (Further declines in the Greek economy would be even more likely if, as some experts project, Greece can’t lift capital controls, and fully reopen its banks, until September.)
It’s hard to see this as resulting in any thing other than a Greek exit from the euro at some point in the future when EuroZone members decide they can’t/won’t pony up for a fourth bailout program.
The damage that this agreement does to the euro and even the European Union is extreme. Don’t for a moment that that the anti-euro/anti-European Union political parties in countries such as France, Italy, and the United Kingdom won’t seize up the agreement as an attack on Greek sovereignty and an example of what their own countries can expect from the bureaucrats in Brussels and the bullies in Berlin. (The hash tag #ThisIsACoup has been strongly trending on Twitter.) The European Union already faced demands from the United Kingdom to renegotiate the terms of its membership in the European Union (the United Kingdom isn’t part of the EuroZone.) Those talks were already likely to prove difficult and the spectacle of Greece being humiliated by countries that call themselves “partners” is likely to add more fuel to that fire. The odds are still that the United Kingdom won’t leave the European Union, but the odds are worse than they were before these negotiations.
And don’t think leaders in France and Italy aren’t worried about being part of a union that dances to the tune of domestic German politics.
Any agreement, even if approved for negotiation in votes this week, won’t be in place before Greece faces big repayments due to the European Central Bank, including 3.5 billion euros on July 20. The only way to avoid a default on those payments, which would send Greece crashing out of the euro no matter what the result of longer-term negotiations, is for a quick agreement on bridge financing. That is already proving to be a thorny issue. The United Kingdom has informed the European Union it will not contribute to the 10 billion to 12 billion proposed bridge loan. At that level the bridge loan would be larger than the 7.2 billion euro bridge loan that was the original starting point in this round of the crisis.
Yeah, this is going to be an easy bridge loan to negotiate by July 20.
Decision time on Greek debt plan tomorrow: EuroZone markets optimistic that weekend will bring a deal
Greece has made its pitch and now it’s up to the other members of the EuroZone to either strike a deal tomorrow or start planning for a Greek exit from the euro on Sunday. If there’s no deal or likelihood of a deal by Monday, the European Central Bank has intimated that it would not be able to extend more loans to Greece’s banks.
On the surface, the plan that the government of Greek Prime Minister Alexis Tsipras proposed yesterday is confusingly like the deal that it turned down and that Greek voters rejected in a Sunday referendum.
And if you look at just the austerity side of the plan, it’s hard to see how this is any different from the offer from creditors that Greece turned down. Greece has given in to creditor’s demands on just about every item—from ending the Greek islands’ exemption from the VAT tax, to an escalating primary budget surplus that begins at 1% and moves up to 3%, to an end to supplemental payments to the lowest pensions to … The austerity measures add up to 13 billion euros.
If you want to see what Greece gained, however, look at the other side of the plan. Instead of a 3 to 6 month extension with 7.2 billion euros in new money, Greece has proposed a 3-year bailout with 53.5 billion euros in new loans, the reprofiling of existing Greek debt to stretch out maturities and an unspecified amount of debt reduction. Even if the debt reduction part of this plan is speculative, the plan does at least move the issue onto the table. And everyone except the hardest of hardliners now admits that Greek debt is at unsustainable levels.
Right now it’s just about certain that Prime Minister Tsipras will win tonight’s vote in the Greek parliament on the plan. Opposition parties have signed on and the Left Platform of his own Syriza party, the home of the most vocal opposition to more austerity, has said it will support the plan.
That leaves it up to tomorrow’s meeting of EuroZone finance ministers. EuroZone members France and Italy have spoken in favor of the plan and Spain, Ireland, and Portugal favor keeping Greece in the euro if it is possible. But Germany, Slovakia, Finland, the Netherlands, Austria, and the Baltic countries have expressed either skepticism or opposition. Latvia, for example, has said it would find it hard to vote to extend more loans to Greece when pensions in Latvia pay less than those in Greece. Slovakia has asked how it can trust a government that campaigned for a No vote on Sunday to implement promised spending cuts and tax increases. Germany seems divided with Chancellor Angela Merkel’s looking to work for a deal but with her finance minister saying he is opposed to the package and doubting that any restructuring or reduction in Greek debt is possible under the rules of the European Central Bank.
Estimates are that Greek banks will run out of money in the early part of the week absent an increase by the European Central Bank in the cap for the Emergency Liquidity Assistance program.
European stock markets finished the day optimistic that the weekend will bring a deal. The French CAC 40 Index closed up 3.07% and the German DAX Index ended the day up 2.90%.
Well, that didn’t work.
The last minute request by the Greek government for a delay in the 1.6 billion euro payment due to the International Monetary Fund today, for billions in debt relief, and for a new two-year bailout program went no where today. And Greece missed the deadline for repaying 1.6 billion euros to the International Monetary Fund. With the end of the day Greece’s existing bailout program expired.
Today’s last minute offer didn’t get any takers.
It was certainly an odd negotiating position.
It’s roughly equivalent to walking into a bank, pointing a loaded gun at your own head, and demanding “Give me all your cash or I’ll shoot.” The hope, a slim one, is that the bank will decide to hand over the money rather than watch you kill yourself.
In its last minute offer the Greek government asked for 30 billion euros in new funding under a new two-year bailout program, restructuring of the country’s debt, and an extension of the current bailout so that Greece wouldn’t miss payments due to the International Monetary Fund and the European Central Bank. The Greek proposal cites Articles 12 and 16 of the treaty that set up the European Stability Mechanism to deal with a financial crisis just like this one. But Article 16 also requires that any new bailout program must include a new memorandum of understanding. It’s exactly that kind of document that Greece and the EuroZone haven’t been able to negotiate in the recently ended talks.
What is the government of Greek Prime Minister Alexis Tsipras thinking
I can see two possibilities
First, it’s possible that Tsipras still believes that Germany, France, and the other EuroZone members are so afraid of Greece leaving the euro that they’ll give in. That would seem to be a misread of Germany’s Angela Merkel and the International Monetary Fund’s Christine Lagarde—and pretty much every other European leader or European Union official, and I don’t think Tsipras is that dense. (Merkel said today, for example, that there will be no negotiations before the referendum vote.
Second, it could be yet another cynical political ploy designed to manipulate the vote in the July 5 referendum. (Just to be clear the Greek government isn’t the only one playing cynical politics in order to appeal to Greek voters.) If, as is likely, Greece’s creditors turn down this last-minute offer, that would give the Tsipras government more evidence that its creditors are to blame for the breakdown of negotiations. And that might, the thinking could go, buttress the No vote on Sunday
So at the end of the day Greece missed its IMF payment. Tomorrow we move to a new stage in the end game to this crisis when the European Central Bank will decide what to do about supporting Greek banks.
European markets closed down but not with anything resembling yesterday’s plunge. The German DAX Index closed lower by 1.25% and the French CAC was down 1.13%. Spain’s IBEX 35 ended lower by 0.78% and Italy’s Milan market was off 0.48% at the close.