Greece May Get Cruel Reward For Its Success

Greece reported recently that it has reached a primary budget surplus, the Holy Grail of austerity, meaning that once you exclude interest payments on the country’s massive debts, the country is finally taking in more revenue than it spends.

This news should be worthy of a ticker-tape parade, after three years of Draconian retrenchment and a partial writedown of privately held Greek debt. Cruelly, however, the main beneficiary of a return to primary surplus may not be Prime Minister Antonis Samaras and his pro-bailout government, but the main opposition Syriza party, which is pushing for the country to refuse further austerity measures and declare a moratorium on its debt payments. Read more of this post

Repaying LTROs: Good News or Bad?

Research teams across Europe are busy estimating the size of the repayments the European Central Bank will accept next week on the long-term refinancing operations, or LTROs, that banks borrowed last year. I think they’re asking the wrong question.

Much more important is whether repayment will be positive or negative for the euro area, and both are possible. Read more of this post

Beware the unintended consequences in Greece

Greece will be back in the spotlight of the EZ crisis in September for sure, but it has been creeping onto the stage in August as well. Even before the troika conducts its quarterly review on Greece’s progress in hitting the targets set out in the bailout program, there are a few indications that progress hasn’t been good. This week, the government imposed a spending moratorium and reports surfaced that prime minister Samaras will propose to the troika that Greece’s fiscal targets be relaxed. These are obviously not encouraging signs, but they have potentially huge implications for Greece going forward that extend beyond just the next troika review. Read more of this post

Greek Politics: A Step Towards the Exit

All eyes were on France going into the weekend of May 6th, but it turns out the Greek elections have much bigger potential implications for the future of the eurozone (EZ). Last Sunday marked a seismic shift in Greek politics, in which the two main political parties—New Democracy (ND) and Pasok—together failed to win an absolute majority for the first time since the collapse of the military dictatorship in the 1970′s. The path forward for Greece is unclear, but even the best possible scenario doesn’t look good. Read more of this post

Why Greece could be better off outside the EZ

Last week I wrote about the difficulty of doing business in Greece, and the role that the government plays in perpetuating the bureaucracy. Does all of this mean that Greece is doomed? Not necessarily. Returning to the drachma would be ignominious for Greece, but it need not decimate the country and may be the only realistic way of spurring the kinds of structural reforms that are essential if Greece is to make a sustainable recovery. Read more of this post

Has the 3-year LTRO changed the path forward for the EZ crisis?

There has been relative calm in the EZ crisis since December last year, when the ECB announced a three-year long term refinancing operation (LTRO) and a sharp widening of its collateral requirements. Government bond yields fell in the periphery and debt issuance in January went remarkably well, particularly for Spain and Italy. Has the LTRO fundamentally changed the likely path forward in the EZ crisis? Read more of this post

German proposal for Greece’s compliance: accelerating eurozone exit

At the top of my list of to do’s for the past few weeks has been to update the post on Greek PSI that I wrote just before Christmas to include some more recent developments, such as the prospect of ECB participation. Last night, Peter Spiegel from the Financial Times (@SpiegelPeter) published the German government’s proposal for Greece’s “improvement of compliance” with the terms of the bailout, and all of a sudden Greek PSI positively pales in comparison. According to Germany’s proposal, whatever the result of the PSI deal, Greece will need to “legally commit itself to giving absolute priority to future debt service” and “accept shifting budgetary sovereignty to the European level”. If the Greek government is not willing to do this, the troika would presumably turn off the taps of bailout money and Greece would default. With no access to market or official financing, Greece would be forced to exit the eurozone. Read more of this post

3yr LTRO: Breaking or strengthening the banking/sovereign feedback loop?

The 3-year LTRO was announced by ECB president Mario Draghi following the December governing council meeting, alongside (among other things) a drop in collateral requirements at the ECB. These measures were designed to short circuit the endless feedback loop between sovereigns and banks by sticking the ECB right in between them. The idea is for banks to offload questionable assets from their balance sheets in exchange for cheap liquidity from the ECB, which banks can use to lend and invest as banks are meant to do. Will attempts to break the circular reference between sovereigns and banks and prevent the interbank markets from freezing succeed with this new 3-year LTRO, or will banks take advantage of the carry-trade and strengthen the feedback loop? Read more of this post

Greece’s referendum: The Great ‘Greek Out’

You could be forgiven for wondering if Greek prime minister George Papandreou has fully lost it. Late Monday night, he announced that he would hold a referendum on the second bailout package that had been painstakingly agreed for Greece less than a week prior. The announcement took European leaders, the European Commission and key members of the ruling Pasok government (such as finance minister Evangelos Venizelos) by complete and utter surprise. Markets reacted with panic, pushing Italian ten-year government bond yields to record highs and forcing EFSF officials to delay a bond issue for fear of lack of investor demand. If there is a Greek referendum, it could change the choreography but not the ultimate endgame for Greece: an exit from the eurozone. This change in choreography could make the difference between life and death for the euro, however. Read more of this post

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.

Read more of this post


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