Real games of chicken are about fundamentally misaligned incentives.
So, at the weekend’s G8, Europe’s voice was heard, and it muttered something under its breath about Greece ‘respecting the commitments that were made’ to its second bailout’s terms. No renegotiation. We also all know what Alexis Tsipras thinks of pretty much any terms applying to a bailout. Cue the Grexit fear cycle, terror of a retaliatory funding shock, etc.
But what do we really know about the state of the bailout programme as it is now?
In other words, what do we know about how three months of political instability might have sent it off course. The answer is getting clearer every day: the drugs are running out, the lights are struggling to stay on, and the business pages of Kathimerini are full of references to precipitous drops in revenue from privatisation and tax collection.
One telling sign in particular is that the IMF is watching the budget numbers and the arrears situation on a daily basis in the run-up to the elections.
In that case, surely the bailout will have to be renegotiated anyway, whenever the Troika next sits down with a Greek government that can talk to it. That’s economic reality, whatever the Europeans are currently insisting.
And it is also not a million miles from what IMF staff previously said.
Understandings were reached on a fiscal consolidation path (MEFP ¶5) (Table 11). Discussions focused on striking the right balance between the speed of consolidation and the impact this would have on the real economy. The fiscal path accommodates the impact of deflationary labor market policies in 2012 by allowing a primary deficit of 1 percent of GDP (1¼ percent of GDP below the target established under the 5th Review under the SBA). Adjustments of 2¾ percentage points of GDP per year in 2013–14 are then projected to bring the primary balance to the new target of 4½ percent of GDP in 2014 (½ percent of GDP lower than at the time of the 5th SBA review, but still well above the debt-stabilizing level)…
Staff argued that demand effects from the implementation of structural reforms, as well as weaker economic prospects in Europe, called for a longer adjustment period (thus also allowing a more accommodative fiscal policy in the near term). The authorities argued that prolonging the adjustment path beyond 2014 would pose risks to credibility, and given resistance from their European partners, worried that this would be seen as a lack of commitment to Stability and Growth Pact targets.
That’s the *IMF* suggesting the bailout might extend beyond 2014, with less front-loaded reform, and the *Greek government* resisting, or at the very least following the lead of its eurozone creditors. Earlier this year, remember.
Flash forward to May, during and since the failed coalition talks/posturing before the June 17 election.
Syriza has promised to abolish ‘the’ memorandum, though that increasingly seems to shade into renegotiating with the eurozone creditors. (Indeed Tsipras is in Berlin this week to meet representatives of the government. Interesting itinerary for a firebrand.) Meanwhile Pasok and other leftists promised to ‘disengage’ from the bailout, which behind the rhetoric seems to mean adding another year of funding while relaxing some measures. The New Democrats, we’re pretty sure, will say and do anything to keep themselves and their clients in power.
So it’s all change on renegotiation. The point is, the IMF has held out the possibility before, and increasingly facts on the ground make the current timeframe and pace of reforms out of date. Are the incentives that misaligned after all?
Of course there’s also the route John Dizard suggests. The Troika could use the escrow account provisions embedded in the New Greek Bonds to ensure coupons on these are paid from September onwards, while not funding the Greek government. Eventually it would cave, and possibly be forced into primary surplus meanwhile. It sounds neat, but you could argue renegotiating the bailout still has to be done. Even if only to arrange the eventual official sector initiative.
In the meantime, it’s worth checking in on the Troika member that has the power to stop sudden Grexit, and to ensure that Greek banks survive into the election: the ECB.
An update from JPMorgan’s Flows & Liquidity analysts on how much ELA is left to counteract depositor flight from now to June 17:
…even a cumulative outflow of €20bn should be able to be offset via ELA from BoG assuming the ECB imposes no size restrictions. Greek banks likely have around €100bn of unencumbered performing loans in their books which, assuming a 50% haircut, would result in a maximum of €50bn of extra ELA.
In fact when it comes to ELA size restrictions – the ECB last week expanded the limit for the Greek central bank’s liquidity ops by €10bn to €100bn.
Shifting ECB liquidity to ELA, Greek bank recap edition – FT Alphaville
It’s Mostly Fiscal (Transfer) – FT Alphaville