Greeks bearing letters

March 9, 2015

Varoufakis arrives at a news conference after an extraordinary euro zone Finance Ministers meeting in Brussels

Greek Finance Minister Yanis Varoufakis must face the music once more at a Eurogroup meeting of euro zone finance ministers.

The ministers will analyse detailed reform pledges from the new Greek government that it will enact during a four-month extension to its bailout which runs through June.

Trust is in short supply and, at the very least, the plan must not increase overall government spending to pass muster. Until that is all set in stone no more money will flow to Athens, leaving it chronically short of cash.

In a letter to the Eurogroup, Varoufakis outlined plans to fight tax evasion, activate a “fiscal council” to generate budget savings and update licensing of gaming and lotteries to boost state revenues. There was some left field stuff about co-opting students and tourists to help crack down on tax dodgers.

Eurogroup head Jeroen Dijsselbloem said the reform outline sent by Greece to euro zone ministers was “helpful”, but needed to be scrutinised by representatives of the country’s creditors, a move Athens is pressing for having previously said it wanted nothing more to do with the Troika.

ECB Executive Board member Benoit Coeure said the European Central Bank was looking forward to doing just that with time running short. European Commission Vice President Valdis Dombrovskis said even if the contents of the letter was acceptable it was not enough to unblock euro zone funding since the proof would be in the implementation not the pledges.

Varoufakis upped the ante again over the weekend, telling an Italian newspaper that his government could call a referendum or early elections should its euro zone partners reject its plan to restructure debt and spend to boost growth.

The new Greek government insists it won’t run out of funds any time soon but the euro zone has closed most avenues off  in a drive to ensure Greece complies with its bailout programme.

The ECB refused last week to allow it to sell more short-term treasury bills though it did slightly increase the amount of emergency lending available to Greek banks which came perilously close to collapse last month.

That could allow the government to deploy a plan to tap into the cash reserves of pension funds and public sector entities through repo transactions to raise cash though that smacks of short-term gain for long-term pain.

On Friday, Greece repaid the first 310-million-euros instalment of a loan from the International Monetary Fund that falls due this month. More falls due shortly.

The ECB starts buying government bonds with new money today. It will purchase 60 billion euros a month over the next 1-1/2 years at a time when there are already signs of the economy turning up.

The central bank raised its growth forecasts for 2015 and 2016 this week. Bond investors will be looking carefully to see what it is buying in which countries and at what point on the yield curve.

The question is whether, after so much anticipation, it is now thoroughly priced in with yields in Italy, Spain and Portugal having dropped to record lows and investors paying for the privilege of lending to Germany for five years.

It remains to be seen whether banks will use the money to lend to businesses and households although there are signs of life there too and there is a real question as to whether this policy setting is appropriate for Germany, by far the bloc’s largest economy, if its recovery continues at its current pace. Because of the relative size of Germany, more of its bonds will be bought than anybody else’s.

A note of caution from German trade data, just out. German exports in January fell by the largest amount since August, dropping far more than forecast, and imports also slipped a little. It does seem that German recovery will be led by domestic demand this time rather than its industrial might.

EU foreign ministers meeting in Riga on Saturday showed little appetite for stepping up pressure on Russia over Ukraine, preferring to give a fragile ceasefire a chance before deciding whether to apply more sanctions or even to extend existing ones.

EU Commission President Jean-Claude Juncker told a German newspaper on Sunday that the in the long-term, the EU needed its own army to face up to Russia and other threats as well as restore the bloc’s foreign policy standing around the world.

Chad and Niger launched a joint army operation against Boko Haram militants in Nigeria on Sunday, intensifying a regional push to try to defeat the Sunni Islamic group. In a symbolic move on Saturday, the Islamist group pledged allegiance to Islamic State.

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