MacroScope

If Greek talks are tough, check out the EU budget

By Mike Peacock
November 22, 2012

The EU budget summit, which could turn into a marathon as it tries to nail down monies for the next seven years, begins today. With the euro zone repeatedly failing to nail down a Greek deal, the EU would be well advised not to let this negotiation fall apart too. Having said that, there is little sign of great concern in market pricing – presumably the ECB’s pledge to buy government bonds in whatever amount it takes to steady the bloc continues to suppress investor nerves and short sellers.

Net contributors to the budget including Germany, France and Britain want to cut 100 billion euros from the European Commission’s draft budget proposal, but differ over which areas to cut. Meanwhile, the main beneficiaries of EU funding such as Poland, Hungary and the Czech Republic oppose cuts. The meeting is intended to lay the groundwork for political agreement on the budget by EU leaders at their final summit of 2012 in December. It will last two days, maybe more and it could well be that no agreement is reached. Officials say only a cut in real terms – for the first time ever – is likely to do the trick.

Back to Greece and prime minister Samaras will meet Eurogroup chief Juncker in Brussels although he is now largely a passive, angry bystander in this process. While Juncker’s assertion in the early hours of Wednesday morning that a deal was only held up by complex technical matters has some truth to it, there is a far deeper split to be closed.

The IMF is determined that the 2020 target date to cut Greece’s debt/GDP ratio to a “sustainable” 120 percent must be adhered to, the euro zone wants an extension to 2022, which would make the numbers far easier to add up. The IMF in turn thinks there may be no alternative to euro zone governments taking a writedown on their Greek loans (OSI), something they refuse to countenance at this point. Both are firmly held positions.

Tuesday’s Eurogroup meeting was told by the experts that they can have 2020 with OSI or they can go for 2022 without OSI but they can’t stick to 2020 without a debt writedown. Something has to give and it could well have been the IMF and its target date had Juncker not tried to railroad Christine Lagarde publicly in that direction at a joint news conference last week.

Spain, still in no hurry to seek aid and getting on with pre-funding its 2013 financing needs when it must raise a daunting 200 billion euros-plus, will sell up to 3.5 billion euros of bonds maturing in 2015, 2017 and 2021 while struggling Portugal will try to shift two billion euros of t-bills. Despite the lack of short-term pressure on Madrid, its hefty funding task next year, plus the central bank’s warning on Wednesday that deficit targets could well be missed, suggest pressure to take a “bailout lite” will reassert itself before long.

If Madrid approached the euro zone’s rescue fund for help, the European Central Bank could finally show its hand and pile in to the bond market in support of Spain.

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