June 30, 2011

Greece: what is next!

For those who are wondering what is next in the Greek tragedy a clear article from Socgen below explain the possible future scenarios.


Papandreou’s government passes the first austerity hurdle

Against a backdrop of violent demonstrations, George Papandreou’s PASOK government won a first vote on Medium-Term Fiscal Strategy (MTFS) on Wednesday 29. The vote brought a sign of relief but the focus now shifts to the second hurdle: the associated  implementation law which is expected today at midday local time (11 CET). If all goes well, the Eurogroup will then meet on July 3 to finalise a new 3-year programme for Greece involving the private sector. This would effectively remove the need for Greece to access bonds markets before 2015. If the Greek parliament changes significantly the terms of the implementation law (a scenario to which we attach a nonnegligible probability), the risk is that EU/IMF would block the much needed next €12bn tranche. The political vacuum would likely trigger a general election in September and the EU/ECB would have to take aggressive action to stem contagion.

As expected, Papandreou obtained a relatively narrow majority on the MTFS, with 155 votes to 138 (5 abstentions). The MTFS includes €28bn of additional austerity measures for 2011-2012 as well as an accelerated privatisation plan. However, Greece has far from adopted the austerity package. Indeed, the Parliament votes again on Thursday on measures to implement the MTFS.

IMF/EU will only disburse if the implementation law does not lose its inner significance. The Parliaments agreed yesterday on the package as a whole. The risk is now that it modifies substantially some implementation measures, as a result of which the modified MTFS could not meet IMF/EU requirements. The IMF made it clear that the July tranche to Greece can only be disbursed if 1) Greece adopts the austerity package 2) the EU provides concrete assurances that it will continue to provide funding to Greece as stipulated under the EU/IMF adjustment programme. In other words, only after the MTFS is approved can the Troika officially put forward a medium-term funding plan for Greece involving private creditors, through to 2014. And only once Greece is funded for at least the next twelve months will the IMF give its official consent to its share of the quarterly disbursement (€3.3bn over €12bn). A decision from the EU on Greece’s medium-term funding could be reached at the Eurogroup Meeting on Sunday 3 July, rather than on 11 July (as currently scheduled). That would then clear the way for the IMF to authorise its share of the quarterly disbursements too.

No plan B Although not the most likely outcome, significant changes in the MTFS would throw the country in a political vacuum and pave the way for anticipated elections. Indeed, Euro area leaders warned that there was no plan B in case the package was not approved. As the centre-right opposition party New Democracy would be well placed to win the new election and as it is not opposed to austerity per se but wants a ‘different economic policy’, the most likely outcome is that the new Greek government would in the end sign up for an equivalent austerity programme, a process similar to what happened in Ireland and Portugal recently. Greece would then have to rely on short-term funding to avoid a default on coupon payments and bonds redemptions in July and August. One can also envisage that the IMF or EU will give the opposition party the benefit of the doubt during the summer and provide Greece with a bridge loan. But there is no doubt that the turmoil would then be elevated.
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