Today is the most critical date in relation to Greek debt negotiations, according to Societe Generale’s global head of economics Michala Marcussen.
In the wake of a conference call held between Greek prime minister Alexis Tsipras, German chancellor Angela Merkel, French president Francois Hollande and EU commission president Jean-Claude Juncker over the weekend, Marcussen, like the rest of the markets, believes the question now is whether discussions held between the quartet will be enough to secure an agreement at the emergency Eurogroup meeting held later on this evening.
Going on the limited information regarding the conference call, Marcussen believes that “at best, a semi-stable agreement is in the making”.
Here’s Marcussen on what the markets already know following the conference call: the proposed plan reduces tax exemptions for Greek nationals, the current bailout programme may be extended by six months and, for the moment, debt restructuring is unlikely to occur.
“According to the news flow, the new proposal contains scrapping of a range of tax exemptions and a further reduction in early retirement schemes. The aim is to protect broader pensions from further cuts (the creditors want to see savings of 1% of GDP annually by 2016-17) and avoid a VAT increase on electricity. Furthermore, the creditors want no reversal of labour market reforms. Combined, Greek tax exemptions amount to around €3bn.
Press reports suggest that in addition to unlocking the remaining €7.2bn of bailout funds, Greece’s creditors are preparing to offer a six-month extension of the current programme, allocating €10bn of bailout funds initially set aside to recapitalise banks to ensure that Greece has sufficient liquidity to meet its obligations until year-end. The Greek authorities fear that a short-term solution would leave the economy in a state of lingering uncertainty that would weigh further on confidence and thus growth. The next batch of PMI data will give an idea of how much damage the crisis has inflicted on business confidence. Meanwhile, bank lending rates remain high, and notably for SMEs.
An important point for the Greek government is rescheduling of the debt. At the press conference after Thursday’s Eurogroup, President Dijsselbloem not that “We have not discussed this proposal, because the logical order of things is that we first reach an agreement on the terms of fiscal measures, reforms, etc., before we look into the future. The Greek proposal was part of their vision of the future”. This confirms our view that there will be no “unconditional” debt rescheduling for Greece, i.e. this would come only after measures are delivered and is more likely to be part of the discussion of a third bailout programme”.
Marcussen believes that if an agreement is struck along the points outlined above, it would be only “semi-stable” and fraught with risk.
“If agreement is reached along the lines outlined above, it would to our minds be only semi-stable. First, implementation risks and political risks would remain elevated. Second, negotiating a third bailout programme for Greece is likely to be a challenging exercise. As a result, uncertainty would remain high, leaving Greece at risk of further economic disappointment. We estimate that the country needs €60-80bn over the coming three years, and that is assuming a still fairly benign economic environment and no new bank recapitalisation programme. Given the frail stance of the economy, the risk to our estimate is very clearly biased to the upside”.
We’ll soon find out whether an agreement can be reached. The emergency Eurogroup meeting is scheduled for 12.30pm central European time (CET) before a subsequent Euro summit begins at 7.00pm.