Hopes of Greek Riga deal fade

April 21, 2015

German Chancellor Merkel and Greek Prime Minister Tsipras leave after addressing news conference in Berlin

It wasn’t long ago that both Greece and the euro zone declared a reforms-for-funds deal had to be struck at a euro zone ministerial meeting in Riga on Friday to avert disaster.

Now few expect that to happen and all the talk is of a following Eurogroup meeting on May 11 being the crunch moment. A 750 million euros IMF bill is due a day after that.

Greece is supposed to produce a list of economic reforms for its European Commission, European Central Bank and International Monetary Fund creditors to peruse ahead of the Riga meeting, after an initial plan was dismissed as being full of holes.

So far, nothing has been forthcoming. Euro zone deputy finance officials are due to talk on Wednesday to pave the way for Friday’s meeting but may not have anything concrete to work on unless something is produced today.

Greek Prime Minister Alexis Tsipras, elected on a promise to end austerity, is balking at politically sensitive reforms of the pension system and labour markets and a privatization programme to which his conservative predecessor had agreed. That’s a pretty profound list of disagreements.

Unless he knows something no one else does, the euro zone fears he is sleep-walking towards default. “Greece must go faster now. We’re wasting time and time is precious,” French Finance Minister Michel Sapin said.

Dangerously short of cash, Athens could soon be forced to choose between making wages and pension payments or meeting upcoming debt payments. Greece must pay about 1 billion euros in May, most of it owed to the IMF.

To sacrifice the former would be politically catastrophic at home but IMF chief Christine Lagarde said there was no question of any delay to payments Athens owes the Fund.

Greece issued emergency legislation on Monday requiring public sector entities to transfer idle cash reserves to the country’s central bank, as part of efforts to deal with the cash squeeze.

Greece has been tapping into the cash reserves of pension funds and public sector entities through repo transactions as it scrambles to cover its funding needs. Monday’s act excluded pension funds and some state-owned firms. Cash reserves needed by these bodies for immediate payment needs were also excluded.

Greek finance ministry officials told Reuters last week that Athens would need to tap all the remaining cash reserves across its public sector, a total of 2 billion euros, to pay civil service wages and pensions at the end of the month.

Markets are starting to react adversely to this standoff though the ECB is confident that a combination of its QE programme, banking union and a euro zone rescue fund are enough to prevent any serious contagion.

The head of Russian gas giant Gazprom will be in Athens for talks with Tsipras and Energy Minister Panagiotis Lafazanis.

During talks with Russian President Vladimir Putin in Moscow earlier this month, Tsipras expressed interest in a pipeline that would bring Russian gas to Europe via Greek territory. Russia denied a weekend German media report suggesting it could soon sign a gas pipeline deal with Greece which could bring up to five billion euros into Athens’ depleted coffers.

The European Union proposed doubling the size of its Mediterranean search and rescue operations after as many as 900 people were feared killed in the deadliest known shipwreck of migrants trying to reach Europe.

A decision to scale back naval operations last year seems to have increased the risks for migrants without reducing their numbers. European Council President Donald Tusk has called an extraordinary summit of EU leaders for Thursday to plan how to stop human traffickers and boost rescue efforts.

Emerging markets have been roiled by the strong dollar/weak euro. Hungary is unusual in that it’s problem is a strong currency so its central bank is expected to trim interest rates by a further 15 basis points to a new low of 1.8 percent today, responding to sub-zero inflation and a buoyant forint.

With the ECB’s money-printing scheme in full swing, the euro weak and food and energy cheap, prospects for the euro zone are starting to look up. Germany’s ZEW sentiment index for April will give a first glimpse of how the second quarter has begun.

Germany’s leading economic institutes collectively raised their 2015 growth forecast to 2.1 percent from a previous 1.2 last week. They predicted quarterly growth of 0.6 percent in Q1, tempering slightly thereafter.

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