Greece Debt Crisis Officially Averted. For Now…

February 20, 2015 3 Comments

There was a 50% chance that Greece was forced to leave the Euro. The chance of capitulation was so strong, that the ECB made preparations on the off chance that Greece and the EU wouldn’t reach a deal. It just so happens that the two sides finally agreed to come to terms on a deal to extend the bailout for 4 more months.

Now you’re probably reading this thinking, “Didn’t Greece originally rejected the initial bailout extension offer, calling it ‘absurd?’” That is mostly correct. Greece originally wanted to replace the original bailout deal with a new loan (loan extension) that would give the nation more time to come up with a permanent solution to their debt crisis. That actually did not end up happening.

It’s not what the Greeks wanted, but it will give them time to come up with a follow up arrangement. So for the time being, Greece managed to avoid a crisis. However, this agreement is not set in stone yet. The EU and Greece have an arrangement on the pretext that Greece comes up with a plan for serious reforms by Monday (yes, this Monday), which is great. The markets will be closed over the weekend, and its just enough time for everyone to catch a breathier. Come Monday, the entire financial markets will enter another level of hell and this time, I don’t believe they will be so optimistic.

From the Eurogroup:

Eurogroup statement on Greece 

The Eurogroup reiterates its appreciation for the remarkable adjustment efforts undertaken by Greece and the Greek people over the last years. During the last few weeks, we have, together with the institutions, engaged in an intensive and constructive dialogue with the new Greek authorities and reached common ground today.
 
The Eurogroup notes, in the framework of the existing arrangement, the request from the Greek authorities for an extension of the Master Financial Assistance Facility Agreement (MFFA), which is underpinned by a set of commitments. The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement, making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions. This extension would also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece.
 
The Greek authorities will present a first list of reform measures, based on the current arrangement, by the end of Monday February 23. The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review. This list will be further specified and then agreed with the institutions by the end of April. 
 
Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup.  
 
In view of the assessment of the institutions the Eurogroup agrees that the funds, so far available in the HFSF buffer, should be held by the EFSF, free of third party rights for the duration of the MFFA extension. The funds continue to be available for the duration of the MFFA extension and can only be used for bank recapitalisation and resolution costs. They will only be released on request by the ECB/SSM.
 
In this light, we welcome the commitment by the Greek authorities to work in close agreement with European and international institutions and partners. Against this background we recall the independence of the European Central Bank. We also agreed that the IMF would continue to play its role.
 
The Greek authorities have expressed their strong commitment to a broader and deeper structural reform process aimed at durably improving growth and employment prospects, ensuring stability and resilience of the financial sector and enhancing social fairness. The authorities commit to implementing long overdue reforms to tackle corruption and tax evasion, and improving the efficiency of the public sector. In this context, the Greek authorities undertake to make best use of the continued provision of technical assistance.  
 
The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.
 
The Greek authorities have also committed to ensure the appropriate primary fiscal surpluses or financing proceeds required to guarantee debt sustainability in line with the November 2012 Eurogroup statement. The institutions will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account.
 
In light of these commitments, we welcome that in a number of areas the Greek policy priorities can contribute to a strengthening and better implementation of the current arrangement. The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.  
 
On the basis of the request, the commitments by the Greek authorities, the advice of the institutions, and today’s agreement, we will launch the national procedures with a view to reaching a final decision on the extension of the current EFSF Master Financial Assistance Facility Agreement for up to four months by the EFSF Board of Directors. We also invite the institutions and the Greek authorities to resume immediately the work that would allow the successful conclusion of the review.
 
We remain committed to provide adequate support to Greece until it has regained full market access as long as it honours its commitments within the agreed framework.

What does this mean? Basically, this entire crisis came down to a game of chicken, and Greece chickened out and surrendered to the demands of Germany.

Four More Months

The agreement extends the Master Financial Assistance Facility Arrangement (MFAFA) by four months. This allows Greece to find a sustainable way to fund itself within the short-term and open the floor for more negotiations afterwards.

An End To Bailouts. Eventually…

The bailouts are essentially coming to an end. When and how is another matter. Monies or outstanding funds from the current European Financial Stability Facility (EFSF) program must be approved by the Eurogroup before any funds are disbursed.

Eurogroup Holds The Pursestrings

When it comes to bank recapitalization, Greece ends up with the short end of the stick, yet again. Initially, the purpose of the EFSF was to provide assistance to member EU states with ‘unstable’ economies. The role of providing assistance and financial stability was the responsibility of the Hellenic Financial Stability Fund (HFSF). Thanks to the ’New Deal,’ the Eurogroup has both institutions under their whim for the purpose of financial stability. The Eurogroup gets to use assets from the EFSF and the HFSF so that their funds can only be used for the purpose of recapitalizing the banking sector.

Why is this a problem for Greece? Well, Greece initially thought that their bailout funds would be held by the HFSF, which is a Greek private institution. This opened up the possibility of the funds having other uses besides banking. Instead, the funds are going to be held by the EFSF.

Big Brother Is Still Watching…

The International Monetary Fund (IMF) is still involved in the affairs of Greece, and has an active role in the bailout extension.

So what exactly did Greece get out of this deal? For one, Greece gets to pick their own austerity measures, which allows for greater flexibility. They get to establish their own reform measures, and Syriza now has a more difficult time fulfilling their campaign promise. Other than that, most people would say that Greece walked away with very little, and most people would be right. Alex Tsipras campaigned on the anti-austerity, anti-reforms, anti-current bailout program, and didn’t provide anything he promise to the Greek population. If anything, all he got was his choice of what poison he would like to ingest.

Which brings me to the final thing Greece absolutely caved on:

Four More Months, Instead Of Six:

Initially, if there was going to be any agreement at all, Greece wanted a six-month extension to the bailout program. The Eurogroup only agreed to four months. This is a big deal, because the extension expires in June. There are two crucial payments happening in July and August

Here is the timeline from WSJ Graphics:

On July 19th, Greece needs to repay the ECB and Greek treasury holders, debt totaling €3.5 billion. A month later, Greece has to repay €3 billion to the ECB again. So, it is likely that Greece will find themselves in a similar situation again. That is, if they don’t find themselves in a tough spot next week.

Ultimately, the Eurogroup has a chance to relax this weekend, while Greece and Syriza has to pull out all of the stops to remain solvent past Monday afternoon. The newly elected party is learning (the hard way) that running a campaign is very different from actually running a government (theres a concept!). The Greek economy remains in a perpetual toilet, and they have very little bargaining power. Perhaps it would be best if Schaende, Varoufakis and Tsipras would learn that beggars can’t always be choosers.

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