Creditors likely to offer Greece extensive new bailout program if tough reforms are rapidly implemented. Greek parliament must act by Wednesday; markets likely in wait-and-see mode…..
Greek drama: Tougher terms against the promise of new financial support
European policymakers have presented Greece with a position paper in which the Eurogroup stipulates in great detail the conditions which Greece needs to fulfill in order for a new financial support program to be launched. The list of measures is divided into two parts. First, the Eurogroup demands that the Greek parliament approve by Wednesday, 15 July a number of important measures, which include a broadening of the VAT tax base, the implementation of a law to ensure automatic fiscal adjustments, first pension reform measures, the granting of legal independence for the Greek statistical office, a reform of the Civil Code to speed up legal procedures, as well as the implementation of a law of bank resolution (this within a week.) A second set of measures is to be implemented in the course of a new financial support program. These measures would be included in a so-called Memorandum of Understanding with creditors. Measures here include reforms of labor, product and energy markets, further pension reforms, as well as acceleratedprivatizations. Finally, the paper demands that the Greek government allow detailed control of implementation to the European Union and International Monetary Fund (the involvement of the latter in a third bailout program appears as yet to be undecided).
Estimates of financial requirements raised substantially, but still no explicit promise of debt relief
In return for fulfilling these conditions, the position paper promises renewed multi-year support for Greece. The total sum needed for a three-year period is estimated in the paper at between EUR 82 bn and EUR 86 bn. Between EUR 10 bn and EUR 25 bn of these funds are expected to be used for bank recapitalization. The paper also acknowledges the immediate financing needs of the Greek government on 20 July to repay the European Central Bank (ECB). While the position paper indicates that Greek debt may be unsustainable, it repeats that explicit debt haircuts are not possible.
Next steps in the drama: Greek politics
Given the harsh demands of creditors, not least regarding the role of the so-called Troika in supervising the implementation of reforms, it appears likely that the split within the governing Syriza party, which already appeared at the beginning of the week, will deepen. Nevertheless, it seems likely that the measures will pass in parliament with the support of the opposition. It might be that Prime Minister Alexis Tsipras will then formally invite members of the opposition to form a government of national unity. Alternatively, he might call for new elections.
Grexit not completely off the table
If the Greek side rejects creditors’ conditions, a Greek exit from the euro remains a possibility. In fact, such a development is mentioned in the position paper (albeit in brackets), which indicates – not surprisingly – that there is no consensus on the matter. Given that important political decisions in Greece remain pending and a Greek exit from the euro is not completely “off the table” yet, financial markets are, in our view, likely to respond to this weekend’s developments with a wait-and-see approach. After the strong rally in risk assets at the end of last week, some setbacks in risk assets would not be surprising. It is our view that while Grexit has become less likely in the wake of developments this weekend, such an event cannot be fully ruled out. As regards the ECB’s actions, we believe that last night’s agreement implies that the ECB is likely to maintain its liquidity assistance to Greek banks. If the Greek parliament approves the first set of measures on Wednesday, we may see an easing of these conditions. However , Greek capital controls are likely to remain in place for longer.
Source: BONDWorld.it
Iscriviti alla Newsletter di Investment World.it
