Wednesday 20 November 2019

It's debt roulette as money may run out in matter of weeks

Finland Prime Minister Alexander Stubb has spoken out, stating:
Finland Prime Minister Alexander Stubb has spoken out, stating: "We will not forgive any loans. We are ready to discuss extensions to programmes or extensions to loan repayment periods" (REUTERS/Ruben Sprich)
The new Greece of Alexis Tsipras will run out of money by early March (AP Photo/Thanassis Stavrakis)
Newly appointed Greek Finance Minister Yanis Varoufakis signs official documents following a swearing in ceremony at the presidential palace in Athens, as Greek Prime Minister Alexis Tsipras unveiled a cabinet of anti-austerity veterans on Tuesday, signaling he has no intention of backing away from election pledges despite warning shots from the euro zone and financial markets(REUTERS/Yannis Behrakis)

The new Greece of Alexis Tsipras will run out of money by early March.

It will then face a series of escalating crunch points that will end in default and a return to the drachma unless it can reach a deal with EU creditors. Greece must repay €3.4bn to the International Monetary Fund in February and March. Tax revenues have collapsed as Greeks pre-empt what they hope will be a repeal of austerity taxes.

"There is only €1.9bn left in the cash kitty, and the government has spending costs of $2.5bn coming up. Somebody needs to lend the country money soon," said Megan Greene, from Manulife Asset Management.

The Greek media reports that capital flight last week reached €10bn as it became clear that the amalgam of ex-Leninists and radical socialists known as Syriza would win the election. Barclays estimates the outflow at €20bn since early December, roughly 12pc of GDP.

The European Central Bank is, for now, stepping into the breach. Liquidity support for Greek banks spiked to €54bn at the end of December, and is rising fast. If the ECB were to pull the plug, Greece would spiral into a systemic crisis immediately.

Yet that could in theory happen as soon February 28, when the temporary extension on Greece's bail-out package expires. The final drama will occur in July and August, when Greece has to repay €7bn to the ECB.

"It is absolutely certain that we can't agree to any debt relief involving Greek bonds held by the ECB. That is legally impossible," said Benoit Coeure, an ECB board member. One banker with close ties to Greece said the crisis may come to a head much sooner. "If there is no bail-out extension, Greece faces a really serious crunch. The EU may give Tsipras an extra month but they are not going to let this drag on. Events will accelerate," he said. Mr Tsipras held out an olive branch to Germany and EU creditors after his landslide victory.

"There will neither be a catastrophic clash nor will kowtowing continue. We are fully aware that the Greek people haven't given us carte blanche," he said.

Yet his election campaign was one long vow to repudiate the austerity demands of the EU-IMF Troika from his "first day in office", even as he insisted that Greece will not give up the euro. He aims for a grand debt conference modelled on the London accord in 1953, when past enemies scarred by war agreed to rebuild Europe on new foundations. Germany secured 50pc debt relief. That is what he wants for Greece. Yet his demands drive a coach and horses through the Troika "Memorandum".

Wolfgang Schauble, Germany's finance minister, said Greece is legally bound by its agreements. "There are rules, there are agreements. New elections change nothing," he said.

Mr Tsipras's decision to form a coalition with the right-wing ANEL, or Independent Greeks party - rather than the centrist Potami party - strongly suggests that he intends to force a showdown with the Troika. Party leader Panos Kammenos is virulently anti-German, describing his country as an occupied land under the austerity dictatorship of a Fourth Reich.

"We will never drop to our knees to beg from Angela Merkel," he said.

The only policy that ANEL has in common with Syriza is a shared zeal to annul much of the €245bn debt imposed upon the Greek state in a series of Troika loan packages that allowed German and French banks to dump their bonds on taxpayers. Dimitris Drakopoulos, from Nomura, said the Syriza-ANEL coalition will be even more "confrontational" than if Syriza had won an outright majority. "We think the divergence of views with the Troika is so large as to be unbridgeable," he said.

Mr Drakopoulos said the markets will have to "reprice the risk of an ultimate confrontation with Europe", even if Syriza is forced to back down in the end. "The eurozone is not going to play ball with Tsipras. He has very little leverage," he said.

Germany is already smarting over its defeat at the ECB on quantitative easing. Its leaders fear that the whole austerity strategy for Europe's crisis states will fall apart if Mr Tsipras get what he wants, and they also believe that Portugal, Italy and Spain are now strong enough to withstand contagion.

There was not a flicker of tension in the debt markets of those three states yesterday. "Europe should clearly signal that it is not susceptible to blackmail," said the ZEW research institute in Mannheim. It said the EU authorities should order an immediate stress test of the banks linked to Greece and drive home the message that they are willing to accept a Greek default, even if this means large losses for taxpayers.

Chancellor Merkel has so far kept a low profile, preferring to let Finland's prime minister, Alexander Stubb, do her speaking for her. "We will not forgive any loans. We are ready to discuss extensions to programmes or extensions to loan repayment periods," he said. The outlines of a temporary deal are emerging. IMF chief Christine Lagarde said there was "no question of cancelling Greek debt", deeming it unfair to other EMU states. It would entail losses for Italian and Spanish taxpayers just as much as for Germans. She chose her words carefully, calling on Greece to reform the state bureaucracy, the judiciary and the tax system. "These are not austerity measures," she told 'Le Monde'.

Syriza itself wants to reform these areas, and may in fact do better than the old Pasok-New Democracy duopoly that ran the state as patronage machine. (© Daily Telegraph, London)

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