Greece Given 48 Hours to Reach Deal as EU Leaders Weigh Debt

byMark DeenArne DelfsJonathan Stearns

 

June 22, 2015 — 3:29 PM EDTUpdated on June 22, 2015 — 7:24 PM EDT

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European leaders gave Greek Prime Minister Alexis Tsipras’s government 48 hours to make the final push needed to satisfy creditors and end a five-month standoff over aid that risks splitting the euro.

Leaders from Greece’s 18 fellow euro-zone countries agreed that Tsipras’s government was finally getting serious about striking a deal after it submitted a set of reform measures that began to converge with the terms demanded by creditors. They agreed to step up the pace of negotiations to secure a breakthrough on Wednesday that leaders can sign off at the end of the week.

The package of proposals represents “a certain step forward, but it was also said very clearly that we’re not yet where we need to be,” German Chancellor Angela Merkel told reporters in Brussels after an emergency summit Monday night. “Hours of the most intensive deliberations lie ahead of us.”

Greek stocks and bonds surged earlier on Monday after Tsipras’s government submitted new proposals addressing the areas of pensions and fiscal targets that had proven the chief barriers to a deal. Disagreement remains over the fine print, with revenue from sales-tax rates the chief sticking point, according to an EU diplomat who asked not to be named because the talks are private.

‘Total and Viable’

A meeting of euro-area finance ministers was convened for Wednesday to prepare the ground for a second, scheduled summit of European Union leaders that begins the following day.

Negotiations with creditors will continue over the coming 48 hours to achieve a “total and viable solution,” Tsipras told reporters in the early hours of Tuesday. The government aims for the country “to be able to stand again on its feet very soon,” he said.

With the clock ticking toward a June 30 deadline both for the expiry of the European portion of Greece’s bailout and payments to the International Monetary Fund, leaders stressed the work still to do in the time available. While they didn’t discuss the IMF payment, they did raise Greece’s future financial viability given its debt load, the highest in Europe.

French President Francois Hollande cited “the lengthening of maturities, or re-profiling of the debt,” saying that “it needs to be indicated as a forthcoming step,” albeit not in the coming days.

Merkel said that rendering Greece’s debt sustainable wasn’t discussed in detail, but “it became clear that this question of financial viability has to be part of the agreement.”

Greek Rally

Greek stocks and bonds extended their rally on Monday, with the Athens Stock Exchange Index closing 9 percent higher for its biggest closing gain since Feb. 24. The yield on the two-year government bond fell 511 basis points to 23.8 percent, and the 10-year yield fell 150 basis points to 11.2 percent.

The rally was fed by hopes of an imminent deal after the Greek government said its proposals included steps to eliminate early retirement options, hike the sales tax, increase tax surcharges that middle- and high-income earners pay and to introduce a levy on companies with annual net income of more than 500,000 euros ($568,000).

Finance chiefs meeting earlier on Monday asked the three creditor institutions — the European Central Bank, the IMF and the European Commission — to examine the proposals in detail with the Greek authorities to speed an agreement.

Parliament Support

Even if he reaches a tentative accord this week, Tsipras will still need the support of parliament in Athens, which is dominated by lawmakers from his Syriza coalition opposed to austerity measures such as pension cuts. For its part, Germany insists on Greek lawmakers taking the first step by passing economic policy changes before the German lower house will agree to a revised aid deal.

“I am convinced that this is not only our intention to finalize the decision-making process this week — we will finalize the process this week,” EU Commission President Jean-Claude Juncker told the closing press briefing.

The package is “certainly more comprehensive and includes much more details than what we have seen, but it still lacks specificity,” IMF chief Christine Lagarde told reporters. An “enormous” amount of work lies ahead, she said.

 

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As we stated yesterday, the fun begins as Tsipras does not have the full support of his party:  It looks to me that there will be a snap election whereby Tsipras gets to explain why the Troika have been obstinate with him refusing to give even an inch.

(courtesy zero hedge)

On Monday evening in “Greece Capitulates: Tsipras Crosses ‘Red Line’ Will Accept Bailout Extension,” we outlined the political battle facing Alexis Tsipras in the wake of the Greek PM’s move to effectively strike a deal with creditors that includes higher taxes and restrictions on early retirements. The agreement, which some reports suggest came with an implicit assumption about the necessity of extending the country’s second bailout in order to bridge the gap between payments due to creditors over the coming weeks and final discussions around a third program, has not been received well by Syriza party hardliners.

To be sure, no agreement with creditors would have satisfied the more radical members of the party, many of whom believe the best option for Greece is to default and return to the drachma — these lawmakers contend redenomination would not be as economically catastrophic as the EU would have them believe. If Tsipras cannot rally enough support for the new proposal, a political shakeup may be necessary. Here’s Reuters with more:

Greek lawmakers reacted angrily on Tuesday to concessions Athens offered in debt talks and parliament’s deputy speaker warned the proposals would struggle to win approval, puncturing optimism that a deal to lift Greece out of crisis might be quickly sealed..

 

“I believe that this program as we see it … is difficult to pass by us,” Deputy parliament speaker and Syriza lawmaker Alexis Mitropoulos told Greek Mega TV on a morning news show.

 

If parliament does fail to back the latest offer, which included higher taxes and welfare changes and steps to curtail early retirement, Tsipras might be forced to call a snap election or a referendum that would prolong the uncertainty.

 

“The prime minister first has to inform our people on why we failed in the negotiation and ended up with this result,” Mitropoulos said. “I believe (the measures) are not in line with the principles of the left. This social carnage … they cannot accept it”..

 

“If (the government) does not have the parliamentary majority, it cannot remain (in power),” government spokesman Gabriel Sakellaridis told Mega TV.

 

Ahead of emergency talks on Monday in Brussels, Tsipras had spent hours with his cabinet in an apparent attempt to secure their backing.

 

“The government has fallen into a trap, I don’t know to what extent this can be implemented,” Pavlos Haikalis, a deputy with Syriza’s junior coalition partner, the Independent Greeks, told Antena TV.

And more from Bloomberg:

While the government’s plan still falls short of creditors’ demands, some Syriza lawmakers already described it as a capitulation.

 

Tsipras “has to explain to the people why we failed in a negotiation and arrived at this result,” deputy parliament speaker and Syriza lawmaker Alexios Mitropoulos said Tuesday in a televised interview on Mega. “After five months of negotiations, I consider that, at the very least, the negotiation didn’t succeed.” 

 

His remarks illustrate the kind of internal opposition Tsipras will have to overcome to secure backing for an agreement that runs against his party’s pledge to end austerity.

 

“Every lawmaker has a personal responsibility, to recognize and understand not just the urgency of the moment, but the urgency of the whole project,” Gabriel Sakellaridis, Tsipras’s spokesman, said in an interview with Mega TV. In a public relations blitz, Sakellaridis gave at least three television interviews in Athens Tuesday morning.

And once again, here’s Deutsche Bank to explain the process:

Subject to further progress this week, focus is likely to shift very quickly to the Greek domestic political front. Disbursements for Greece ahead of the IMF tranche due at the end of the month will require domestic parliamentary approval. It is likely that the Greek PM would first attempt to obtain approval from the SYRIZA party’s 200-strong Central Committee before bringing an agreement to parliament. In the event of failure at the party level, a referendum would likely be called. In the event of party approval, a vote would be likely taken to the parliamentary floor. Depending on the process adopted, such a vote may take between 2 days to a week. 

It will remain a major challenge for the Greek PM to successfully pass a potential agreement through parliament. Local press reports that 10-40 SYRIZA MPs are likely to dissent (the government has an 11 MP majority), while overnight the Independent Greeks junior coalition partner (12 MPs) has also raised the possibility of withdrawing from government. How the political process plays out largely depends on the number of MPs the current government loses. A loss of less than thirty parliamentarians may force a change in coalition to include the two small moderate parties in parliament (PASOK and the River) jointly controlling 30 MPs. More substantial losses requiring the support of major opposition party New Democracy would open up the possibility of broader changes to the government or a referendum.

Finally, here is Barclays’ flowchart:

Again, we see that a government shakeup may be necessary to get the agreement through parliament and indeed, a reshuffling that serves to align Greece more closely with creditors will be welcomed in Brussels and would of course mean that the troika will have succeeded in using financial leverage to subvert the democratic process.

In the mean time, Tspiras must navigate between Scylla and Charybdis (to use a uniquely Greek metaphor). On the one hand, squandering Monday’s progress with creditors would likely spell the end of the Greek banking sector as Mario Draghi would come under enormous pressure from Berlin to curtail emergency funding. On the other, pushing the new proposal through parliament will cost Tsipras politically, as hardliners will likely attempt to gather public support by claiming the PM has abandoned his electoral mandate. For Tsipras, the decision to fold to Brussels and the IMF (albeit with a set of proposals that don’t entirely match what creditors were looking for) likely came down to this: remaining defiant and allowing Greece to return to the drachma would have made Tsipras a national hero for a time, but the acute economic hardships that Greeks would subsequently suffer would likely have led to his ouster at some point, so chancing a referendum or snap elections now in order to avert an imminent economic collapse is the lesser of two evils and likely gives the PM the best chance of retaining power over the long run.

In any event, Tsipras’ new proposal was enough to appease the ECB, which once again lifted the ELA cap on Tuesday, ensuring that Greek banks could meet withdrawal requests for another day and in the process tacking another €1-2 billion onto Germany’s TARGET2 credit. Meanwhile, analysts are looking past June and asking what happens next. Here’s how UBS sees the situation playing out (via Bloomberg):

If there’s no agreement this week, Greece won’t be able to pay the IMF and in turn won’t receive cash due from the fund.

 

If there is an agreement, Greece will eventually need a third bailout; estimate potential size ~EU30b with partial restructuring of OSI debt.

 

Don’t think there’s appetite for another large number among creditors.

 

This amount would enable Greece to partly repay ECB, the most expensive debt they owe.

 

ECB could release SMP profits of around EU9b, enabling government to pay around half of outstanding IMF loans (also quite expensive) and reduce interest costs.

 

Taking out relatively cheap ESM loans would help debt sustainability. Any new deal should reduce multiple payment deadlines over next few years.

 

Can’t exclude IMF being repaid ahead of schedule and leaving Greece program early; not central case given the numbers involved. May agree something like in Ireland, where Greece is allowed to repay IMF earlier where possible.

Obviously the next several days will be critical, as Brussels will watch closely to see if, after finally extracting concessions from Tsipras, it will be one step forward on the road to transforming a revolutionary into a pandering technocrat and two steps back towards unruly leftist radicalism.

*  *  *

Here’s more on the “deal” from KeepTalkingGreece:

Eurogroup meetings, Institutions meetings, Euro Leaders meetings. Monday’s race between Greece and the creditors ended … early Tuesday without a deal. But with a perspective for a deal. And a bombastic package of austerity measures worth 8 billion euro for 2015 and 2016.

The exhausted Euro Leaders exited the summit with statements one could hardly understand what was the real substance behind. Chancellor Merkel for example spoke of “new Greek proposals that were a good starting point for further discussions”, while she claimed that they did not know “if Greek debt sustainable” despite the 5 months of negotiations.

IMF’s Lagarde repeated the usual “A lot of work has still to be done.”

 

Others said that a deal has to be reached in the next 48 hours.

 

EC’ Juncker: “I’m convinced that we will find an agreement this week, for the simple reason that we have to find an agreement this week. It’s not the right moment to discuss debt relief.”

 

Germany’s Merkel also tried to sidestep the crucial issue of debt relief and told reporters after the summit: “We will now that the Greek debt is sustainable, we will know more on Wednesday night.” She stressed that “No further credits can be extended until the second bailout terms are complied with.”

 

France’s Hollande said also that “extension of bailout programe, debt restructuring will only come at a second stage.”

At the end of the Euro gibberish it was suggested that Greece’s creditors had found the additional proposals as a basis for a discussion that should continue with a Eurogroup meeting on Wednesday and another Euro Leaders Summit on Thursday. Target is an “austerity for cash” deal this week and thus before the June 30th when Greece is expected to pay €1.2 billion to the IMF. The two sides have still to agree on several issues and creditors expect to demand more “austerity measures” from Greece.

The creditors made it clear that the Greek government has to pass the deal through the Greek parliament first and then be allowed to receive the life-saving bailout money: 7.2 billion euro bailout tranche.

The Greek proposal leaked to the press on Monday literally shocked every Greek and especially the SYRIZA lawmakers and its junior coalition partner Independent Greeks.

Two SYRIZA MPs said that they will not vote for the austerity package respectively for the deal. Mitropoulos is well known for his “populist” and Michelogiannakis.. well.. he is known for having started a hunger strike in solidarity with Syrian refugees and in the breaks he went for a coffee.

“My personal view is that these measures cannot be voted, they are extreme and antisocial,” said Syriza MP and vice president of the Greek parliament, Alexis Mitropoulos.

 

“An agreement based on the Greek government’s proposals is a tombstone for Greece, and will not pass from Syriza [party bodies],” said Syriza MP Giannis Michelogiannakis.

 

Communist Tendency, a far-left faction within Syriza, issued a statement urging Syriza MPs to vote against the agreement. (viaeuractiv.com)

From the Independent Greeks front it has been said that the “Value Added Tax on the islands was a “red line and casus belli.” However this issue has not been fixed yet in Brussels.

Government spokesman Gavriil Sakellaridis said that if the deal will not receive the government majority votes then “only option is elections.”

However it is too early judge about the voting. Sakellaridis said that “the deal” has to be brought to the Parliament before the end of the week, so that lawmakers be informed.

A voting could take place on Sunday.

Some of the revenue increasing  measures are “tough” and include V.A.T and tax hikes as well as reductions in net income for pensioners and employees.

Some SYRIZA MP like Nikos Filis said last night in an effort to justify the measures that “there are not pension cuts”. But increasing the health care contribution and the VAT in food will effectively leave thousands of low-pensioners with less money available.

Anyway, the VAT issue is been expected to be taken up at Wednesday’s Eurogroup.

Another issue at the focus of criticism in the media today is the increase of contributions in social security. Employers complain that the increase will put obstacles to hire personnel.

Meanwhile, the ECB increased the Emergency Liquidity Assistance to the Greek banks on Tuesday morning. On Monday M?rio Draghi reportedly told Alexis Tsipras during a face to face meeting that “the Greek banking system is safe with Greece in the program”.  The program ends on June 30th 2015.

To conclude: There is no deal but an outline of a deal. Greek Prime Minister Alexis Tsipras could hardly accept more austerity measures. After the Euro Summit, he told reporters: “We want a substantial and viable solution” and “The ball is in the court of the European leadership.”

What will happen if creditors demand more measures and Greece reject them? then the ball is indeed in Merkel’s court, as Tsipras has hinted before the Euro Summit.

Suprisingly NOT is that the negotiations do not take into acocunt real structural reforms to overhaul the notorious handicaps of the Greek operating system but instead they focus on pour revenue increasing measures.