Elusive Greek deal

November 1, 2012

So euro zone finance ministers conferred about Greece and Germany’s Schaeuble came out to declare significant progress although no deal yet. Eurogroup head Jean-Claude Juncker looked forward to a final settlement at the ministers’ face-to-face meeting on Nov. 12.
But a source with no particular axe to grind was much more downbeat, saying there was no real progress with Germany and the IMF at loggerheads over the need for euro zone governments and the ECB to take a haircut on the Greek bonds they hold in order to make the numbers add up.

The IMF is convinced it is the only way, Germany will not countenance it.  So all sides remain far apart and that is without even taking account of a knife-edge parliamentary vote in Athens next week on labour reforms to cut wages and severance payments, which the EU and IMF insist are a key part of a new bailout deal, but which the smallest party in the coalition government has pledged to vote against.

That leaves the two larger parties – New Democracy and PASOK – with a working majority of just nine lawmakers and on a less contentious vote on privatizations on Wednesday, a number of PASOK deputies rebelled.

Nonetheless, it’s in no one’s interests to let Greece crash at this point so the presumption is a deal will be done, featuring Greece getting two years to make the cuts demanded of it, extending maturities on its loans and cutting the interest rates. Talk of the ECB foregoing profits on the Greek bonds it holds (rather than taking a loss) continues to do the rounds too although that is complicated by the fact that it has to hand those profits back to euro zone national central banks, who then decide what to do with them. That profit would presumably only be realized when then bonds mature too, unless some new financial engineering is unveiled.

That the numbers don’t add up was laid bare by the Greek government yesterday which said its debt pile would hit 190 percent of GDP next year, that’s up from around 160 percent and resolutely heading away from the 120 percent target set by its lenders for 2020. We know that the troika of EU/IMF/ECB inspectors have advised that another 30 billion euros needs to be found to keep Greece afloat.

Schaeuble also sent jitters around Cyprus yesterday, saying its bailout negotiations may not start until next year. The finance ministry in Nicosia reacted with alarm and said it hoped to conclude a deal before the Nov. 12 Eurogroup meeting. The Cypriot central bank chief is speaking later.

The EU budget negotiations tend to be long, drawn out and dull but things are hotting up this time – with a special summit convened for late November. Britain’s David Cameron suffered a non-binding parliamentary defeat last night as rebels in his own party were backed by opposition Labour in demanding a real-terms budget cut. France, coming from the opposite end of the argument, said it would veto any deal that cut a cent of spending on farming via the Common Agricultural Policy of which it is the biggest beneficiary. This saga will not tip markets into attacking the euro zone again, but it doesn’t look good.

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