The spectre of Greece returns! Predictable perhaps, but no less worrying.

Wednesday 6th April 2016

The spectre of Greece returns! Predictable perhaps, but no less worrying.

ref : "Talk of Grexit is so last year, but brace yourselves for a devastating rerun" , Philip Aldrick in The Times, Business Comment

After a fragile funding deal had finally been put together last year, did we not close the last of our many visits to the subject of Greece with the thought that this hoary problem was a long way from sorted, and was bound to rear its ugly head again 'ere long ? Well, that time has come and its predictability doesn't make the issue any less disturbing.

The spark for the latest bout of anxiety is a new one on us, though ...... a bugged phone call from the head of the IMF's European department Paul Thomsen to his station chief in Greece, which was released by the ever-obliging Wikileaks. In it he said : "in the past there has been only one time when the decision was made and then that was when they were about to run out of money seriously and to default ..... And possibly this is what is going to happen again". Cue happy memories of bank closures. all-night haggling, unseemly name-calling between European politicians and the very real possibility of the Eurozone losing its first casualty .....

The nub of the current flare-up revolves around how the last deal reached in August is implemented. This third 86bn euro bailout has never been officially signed off. 21.4bn euro was handed over to Greece to tide them over last year, but the balance remains pending and is conditional upon Greece fulfilling its side of the bargain. Sound familiar ? As things stand right now, Greece is due to pay over 10bn euro back to the ECB in June and July and will need at least 5bn euro just to avoid default.

In many ways this crisis has not moved on at all .... and we should probably remind ourselves of the size of the problem : Greece debt is twice the size of its economy and 83% of it is owned by foreign governments. Anyway the Eurozone, particularly Germany, wants the IMF to be involved but the IMF's position is that the debt is unsustainable and therefore there must be some degree of debt forgiveness, aka "a haircut". The Germans have always argued against this and insist that, apart from anything else, such a move would in fact be illegal. This is a view restated only yesterday by Angela Merkel ..... mind you, after the soft (humanitarian?) approach she took to the immigration issue saw her party get a kicking in regional elections she was never likely to be an easy touch.

Unsurprisingly Athens heartily agrees with the IMF's insistence on a debt haircut. Where they don't agree is on the IMF's insistence that Greece reforms its generous pensions policy and tackles its long-term reliance on borrowing . This Greece so far refuses to do, offering a number of frankly fairly feeble alternatives in return. So we are left in the situation whereby :

Greece needs at least some of the balance of the last bailout to avoid default BUT the Eurozone won't play ball unless the IMF is involved BUT the IMF wants a debt haircut that the Eurozone wont tolerate AND they insist on Greek reforms that the Greeks refuse to implement. Result : Stalemate , leading to ....? Well, here we go again.

The trouble for the creditors and Europe in particular is that we've been to wire before and despite all the belligerent rhetoric they in effect paid Greece to stay in the Euro on the back of promises that were always going to be desperately difficult to keep even if the desire to do so was genuine. There's a suspicion that the Eurozone, Germany aside, has taken the view that it's worth keeping all members of the Euro together whatever the price. That may not be true but it will no doubt embolden Greece's hand in forthcoming negotiations. 

Look out for :

Minutes of the March FOMC meeting (due tonight), and

Minutes of the last ECB meeting (due tomorrow).

We know what decisions the two central banks made regarding monetary policy, and we know what both Fed Chair Janet Yellen and ECB boss Mario Draghi had to say about them. What we don't know about, and what investors will hope to glean from the minutes of the meetings, is the cut and thrust of the arguments made by members of both boards. ONLY FOR EXAMPLE, if there was a sizable contingent on the FOMC that comes across as less doveish than Ms Yellen, and there was a number on the board of the ECB that wanted more doveish action than Draghi, then that might once more open up divergence plays that have been stymied so far this year. Incidentally, both Yellen and Draghi are due to speak tomorrow too.