Greece will get the next tranche of funding

The troika is threatening to deny Greece more funding unless the country meets the terms of its bailout programme, protestors are gathering in Syntagma Square and Greek prime minister George Papandreou faces significant opposition within his ruling party.

It feels like June all over again.

Everyone is waiting with baited breath to see if the Greek government can pass and implement enough reforms to appease the troika over the next few weeks. However, it is in no one’s best interest for Greece to default next month. Unless domestic political wrangling in Greece precludes the government from passing any further austerity measures, Greece will get more funding in October and disaster will be averted until December.

Austerity…the definition of insanity
The troika dramatically departed Athens earlier this month  and insisted that Greece will not get the next tranche of funding unless it manages to fully implement the terms of the bailout agreement.

With GDP falling by more than expected in the second quarter of 2011 and tax revenues much lower than stipulated in the memorandum of understanding (MOU), Greece’s primary deficit has actually risen in January-July 2011 compared with the year-earlier period. The bailout programme is clearly not working.

At the troika’s insistence, prime minister Papandreou has been busy meeting with cabinet members to discuss further austerity measures to be implemented over the next few years. These measures include a property tax (applied to electricity bills) but reportedly focus more on cutting spending than on boosting revenues.

According to Albert Einstein, the definition of insanity is to do the same thing over and over again and expect different results. By this token, EU leaders have clearly lost it. More austerity measures and structural reforms will not all of a sudden succeed where others have failed.

Avoiding contagion
If further austerity measures are not going to help, why is the troika demanding that Greece adopt them? EU leaders need an excuse to present to their domestic electorates for why Greece deserves any more EU/IMF funding.

In the absence of this funding, Greece will run out of money in mid-October. If Greece were to undergo a disorderly default on its government debt, there would be rapid contagion throughout the eurozone.

The larger peripheral euro area countries Spain and Italy are already under significant pressure in the markets. Italian bond yields are already at unsustainable levels, and Italy must service around €120bn in bonds and T-bills by the end of the year. Contagion from a disorderly Greek default could freeze Spain and Italy out of the markets. These two countries are far too big to be bailed out.

Motivation to kick the can one more time
Furthermore, the impact of a disorderly Greek default on the European banking system—and particularly on German and French banks—would be severe. There have been several indications that the European banking sector is in big trouble without even factoring in a Greek sovereign default. According to the Bank for International Settlements (BIS), German banks held around US$14bn and French banks around US$13.5bn in Greek government debt as of end-March 2011.

If Greece were to default on its government debt next month, the French and German governments would have to recapitalise their banks. However, if the troika transfers the next tranche of funds to Greece, the country will be funded through December.

By this time the reforms to the European Financial Stability Facility (EFSF) agreed in July will have been ratified by individual euro area national parliaments. One of these reforms is to allow the EFSF to recapitalise European banks directly.

By providing Greece with the next tranche of funding in October, EU governments effectively shift the burden of recapitalising their banks to the EFSF should they choose to withhold subsequent bailout funding from Greece.

The biggest risk to the next tranche of funding is from Greece
With the creditor countries clearly motivated to avoid a disorderly Greek default at least until December, the only reason the troika might refuse Greece funding next month is if the Greek government does not play ball.

Further austerity measures in Greece will have to be approved in parliament. The measures might pass, but it will depend very much on discipline in the ruling party, the Panhellenic Socialist Movement (Pasok). The last set of austerity measures put to a vote in parliament—the medium-term programme in June—barely passed even after the government cabinet was reshuffled. Since June, divisions within the ruling Pasok have widened.

It is by no means a foregone conclusion that further measures will be passed. If the Greek government cannot agree on steps to appease the troika, Greece could simultaneously face a disorderly default and an early election. This would be such a disaster for Greece, I think the government will manage to agree to meet at least some of the troika’s demands.

December…all bets are off
While funding will be forthcoming for Greece in October, this is only likely to buy a brief respite for Greece. With profound divisions within Pasok, constant bickering between Pasok and the main opposition party New Democracy and significant public opposition to further austerity and structural reforms, it will be nearly impossible for the government to implement more measures even if it manages to pass them.

Greece is stuck in a negative feedback loop, whereby contracting economic growth undermines the government’s attempts to rein in its fiscal dynamic, and this loop will not be broken in the next few months. When the troika descends on Athens once again in December to evaluate the government’s progress in meeting the terms of the bailout, we will see more drama. The troika is motivated to delay a disorderly Greek default for now, but all bets are off in December.

7 Responses to Greece will get the next tranche of funding

  1. paul costello says:

    They (the banks and euro leaders) also need to strike fear into the hearts and wallets of the electorate. They need to soften up the people to the idea of the euro state… where the very architects of this mess will sit on the throne. Down with people up with banks.

  2. lostgen says:

    “According to Albert Einstein, the definition of insanity is to do the same thing over and over again and expect different results.”

    Another definition of insanity is basing the future expectation on the very last past. While I agree that Greece can never repay its debt, Einsteins definition of insanity is hardly a good argument. If Greece would enforce more and more austerity measures of course it would eventually have a positive effect on the budget, but this is not the point. The point is that it is a very bad policy choice for the Greek population. Greece should focus on structural improvements and default on it’s debt. The real problem is that Greece still has a primary deficit and thus would need to impose further austerity measure even if it choose to default.

    • C High says:

      I was listening to a PASOK politician on BBC Radio 4 this morning. She refused to contemplate the possibility that Greece could leave the Euro, or be ejected from it, and if I understood her correctly seemed to think this outcome would be absolutely impossible. If she is representative of Greek politicians as a whole, then they seem to be suffering from a bad dose of denialism.

  3. jolyonwagg1 says:

    10 years ago everyone in Europe, though mainly the ECB and Brussels elite in there rush for the EU utopia ignored the fiddled national accounts of Greece and let them join the euro. Now 10 years later Greece could be responsible for the demise of the euro. Many southern EU economies fiddled there national finances to get onboard the euro train, like Italy. Now the euro dream is turning into a euro train crash?

    • The chickens are coming home to roost. The Greeks and everyone else knew that the Europeans were not willing to enforce the deficit limits and they let the problem go on for so long that they are now in a situation where there is no good option. The austerity measures are making the economy worse, but without them the Greek debt would get even further out of control. The time to fix this problem properly was many years ago now.

  4. Frankoliver says:

    its easy for all of us to point the finger at Greece or the Euro political leadership. How can we really get out of the mess is only by having the ECB hold thebag, be it infront or behind the EFSF/ESM etc This is where the pressure builds up now.
    The key element to watch now is the pressure on France AAA Rating via rescue operations of Dexia, a similar case to the rescue of Depfa via HRE by Germany.

  5. Joe Bloggs says:

    Greece did get the October tranche, and there is another due in December.
    Where can we find the schedule for these upcoming tranches?

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