The Greek premier, Alexis Tsipras, is preparing his MPs to vote in favor of the measures for the second review, and creating the political agenda for the following day. In the meantime, the IMF and the Eurozone are struggling to reach a compromise on a formula for Greek debt relief that will allow the IMF to participate in Greece’s bailout program. A general formula is expected to be announced by the Eurogroup on 22 May or later in June.
Reading Greek Sunday papers, we understand that the baseline scenario predicts that the Greek government will vote for all necessary measures for the conclusion of the review up until 18 May (it may continue until 21 May). The Eurogroup will approve the conclusion of the review and reach an agreement with the IMF on the Greek debt on 22 May. Next, parliaments of Eurozone countries should approve the agreement and the disbursement of the bailout tranche of around 7-8 billion Euros to Greece. The overall procedure may take 4 to 6 weeks, i.e., Greece is expected to receive the money in the last 10 days of June.
If the Eurogroup approves the second review but cannot come to an agreement with the IMF, the second review will not be considered concluded, and a new Eurogroup will convene on 15 June. If all goes well and an agreement with the IMF is made, Greece will receive the finance after 4-6 weeks, or early July. Greece’s total obligations in July are around 6.5 billion Euros. However, the biggest payment is planned on 20 July (3.9 billion Euros to the ECB) following another big payment to private bondholders on 17 July (2.1 billion Euros).
Even if the baseline scenario materialises, Greece seems likely to miss the ECB’s meeting on 8 June with regard to the inclusion of the Greek bonds in the QE.
Tsipras’s initial plan includes a government reshuffle after the conclusion of the review in late May or mid-June, and implementation of the MoU including all agreed reforms aiming to stabilise the economy and improve employment levels. His narration will be based on the argument that this decision will remove Greece from the MoUs forever.
This plan assumes that Tsipras does not plan early elections until the autumn of 2018. His basic plans predict that the economy will recover, and Greece will no longer need to use MoUs. Instead, Greece will finance its needs through markets. The predicted better performance of the Greek economy will allow the government to implement anti-austerity measures after 2018.
However, this plan may change. Tsipras may decide to hold early elections if some basic assumptions of his plan fail. The main risks are related to the following issues:
- The Greek economy does not show strong signs of recovery. Instead, the European Commission downgraded its forecast for the growth rate in 2017 from 2.7% to 1.9%.
- The labor market needs more time to stabilise and create new jobs.
- It is not certain that the ECB will include the Greek bonds in its QE program this summer.
- Over-taxation has already created a recessionary spiral, keeping consumer and investment sentiment weak.
- The Greek banks remain weak. Capital controls and the possibility of a new recapitalisation (as the IMF believes) do not help to restore certainty.
- Long-term uncertainty and political developments in the following two years will postpone large and productive investments which could boost the economy and employment.
- The need for a fourth MoU after 2018 also postpones investment.
- The private sector (households, Greek small and large companies as well as multinational enterprises with a presence in Greece) is already exhausted by the seven-year recession, uncertainty and instability. A sustainable recovery which may free up capital requires restoration of the domestic financial sector and termination of capital controls. All of the above will need more time to implement.
Thus, we believe that if Tsipras predicts that the economy cannot support his rhetoric in the following months, he will not wait until the end of the program in August 2018. A new review of the program will also start in three months. According to this scenario, Tsipras may decide to hold early elections by the end of the year aiming to meet the following targets:
- He will avoid signing a new MoU after the end of the current one.
- He will avoid tabling the 2019 budget which will include additional measures for the period after 2018 (1% of the GDP in 2019 and 1% in 2020). He will leave this job to the new government, likely New Democracy.
- He will use the political developments in the following years to recover and reclaim the government. He can politically use the planned European Parliament Elections in June 2019 and the Greek presidential elections in February 2020. In the meantime, the new government (e.g., New Democracy) will have implemented all the tough measures for the period 2019-2020 already agreed by SYRIZA.
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Α new opinion poll conducted by Metron Analysis for the newspaper Parapolitica shows the main opposition party, New Democracy, leading SYRIZA by 10.6 percentage points. According to the poll, the percentages of the parties are as follows:
- New Democracy (conservatives, pro-euro): 26.3%
- SYRIZA (leftists, pro-euro): 15.7%
- Golden Dawn (ultra right, anti-euro): 6%
- KKE (communist party, anti-euro): 5.7%
- DIMAR-PASOK (socialists, pro-euro): 5%
- Center Union (center, euro skepticism): 2.9%
- ANEL (right populist, junior coalition partner): 2%
- Antarsia (ultra leftists, anti-euro): 1.9%
- Potami (center, pro-euro): 1.7%
- Popular Union (leftists, anti-euro): 2%
- Plefsi Eleftherias (leftists, anti-euro): 1.4%
- Others: 2.4%
- Most popular political leader: ND’s Mitsotakis: 43% (Tsipras: 25%)
- Best premier: Mitsotakis (26%), Tsipras (13%), nobody (45%)
- Agree with early elections: No (61%), Yes (36%), Don’t Know (3%)
Tsipras’s office has leaked information that he is considering a government reshuffle at the end of the review. According to this information, Tsipras wants to replace ministers with new people who are willing to support the reforms.
We do not rule out this possibility which is likely expected in early June. However, this is one of Tsipra’s traditional tactics to put pressure on his MPs to vote for tough measures. MPs and ministers who will support the government’s agreement with creditors may gain a better position in the new government.
The Greek premier is drafting his government’s strategic plan for the period until the end of 2018. This plan includes the following targets:
- Greece access to markets once the ECB includes the Greek bonds in its QE program (likely after June).
- Implementation of privatization and other reforms so that Greece exits MoUs forever.
- Stabilization of the economy.
These targets will support his rhetoric at the end of 2018 which will include:
- The coalition SYRIZA-ANEL successfully concluded the implementation of MoUs.
- His government achieved better financing terms and debt relief.
- Greece achieved access to markets to finance its needs.
- The government restored the labor market (employment and labor legislation).
This is considered Tsipras’s narration to elections in Q3/Q4 2018. See, also, “Risk Analysis”.
The IMF reportedly asked for the main opposition, New Democracy, to sign a commitment that it will implement the reform program that has been agreed with the current government in the case that New Democracy wins the elections.
- The leader of New Democracy, Kyriakos Mitsotakis, has publicly declared that his party will not vote in favor of the measures of the second review the next week.
- Mitsotakis has assured the IMF that his government will fully respect and implement the agreed reforms. The message was sent to the IMF’s Christine Lagarde through the leader of the European People’s Party last week. Mitsotakis also declared that if a written commitment is needed he is willing to do so, but the commitment is only in relation to the reforms, not economic policy.
- The demand for a commitment from the main opposition is the traditional practice of the IMF. This is especially so if the IMF foresees early elections or that the opposition party will likely be the government during the implementation of a program. As a reminder, the same thing was asked of the former leader of New Democracy, Antonis Samaras, after the conclusion of a review with the government of George Papandreou in 2012. The same was asked of Tsipras during negotiations between the troika and the government of Antonis Samaras in 2014. Tsipras denied to sign a commitment.
The European Commission, the ESM and the IMF are examining alternatives for Greek debt relief. This discussion relates to a general framework set to be announced after the Eurogroup meeting on 22 May or in June. There are many scenarios, but there are two main ideas:
First, reconstruction and extension of the debt maturities so that the debt servicing cost (financing needs) of Greece will remain under 15% of GDP in the medium term and under 20% in the long term.
Second, the ESM could buy out the IMF’s loans (or a part of them) to Greece and replace them with new loans by the ESM with longer maturities and lower interest rates. This solution does not completely cover the financing needs of Greece. Thus, this scenario also requires that Greece be supported to access markets and finance any remaining needs.
The implementation of measures for debt relief will be done in two stages:
First, the creditors will announce a general framework in May or June 2017.
Second, they will define the quantitative details after the current program expires in August 2018.
Progress on this issue is expected during the meeting of key Eurozone and IMF officials in Washington on 11-13 May.
The European Commission downgraded its forecast for the growth rate of the Greek economy in 2017 from 2.7% to 1.9%, according to a European official who spoke to reporters last week. The downgrade was a result of the delay in concluding the review, he explained. The new projection will be included in the new Medium Term Fiscal Adjustment Program for the period 2018-2021 as well as in the ESM’s debt sustainability analysis.
According to information from troika technical teams, the downgrade of the growth rate does not create the need for additional measures. According to their analysis, the growth rate should drop under 1.7% to create new fiscal gap.
The technical teams also confirmed in their analysis sent to the EuroWorking Group last week that there will be a fiscal gap of around 480 million Euros in 2018. The technical teams noted that the Greek government has accepted this gap and will implement additional measures such as: abolishment of the heating oil subsidy for people who receive the so-called social solidarity allowance, and further reduction of tax relief.
According to information from sources in the European Central Bank, the ECB will not consider including Greek bonds in its QE program if the IMF does not participate in the program or if no agreement has been reached on debt relief measures. This means that a positive decision for this matter is not expected earlier than June. The same sources believe that the decision is likely expected in July at the earliest. The worst case scenario foresees the ECB postponing its decision until later; likely after September (following Germany’s elections).
The inclusion of Greek bonds in the ECB’s QE will have a very positive impact on the psychology of markets and the economy. However, the practical effect is expected to be limited due to two reasons. First, the ECB is unable to purchase many Greek bonds because the Bank has already reached the country’s quota. Second, the ECB will stop purchases during the review of the program by creditors. As a reminder, the second review lasted around one year.
- 11-13 May: New round of negotiations for the debt relief on the sideline of the G7 meeting.
- 12 May: T-bills refinancing of 1.4 billion Euros.
- 15-18 May: Greek Parliament votes for the required measures of the second review (it may last until 21 May).
- 22 May: Eurogroup. The IMF and the Eurozone may reach an agreement on the Greek issue, and the second review will be concluded.