Beneath the babble, little sign of Greek progress

June 1, 2015

Greece's Finance Minister Varoufakis and Eurogroup chairman Dijsselbloem talk during an euro zone finance ministers meeting in Brussels

We went into the weekend pondering the Greek government’s expectation that a cash-for-reforms deal would be agreed on Sunday, and we come out the other side with no breakthrough … again.

Instead, the latest line from Athens, from Interior Minister Nikos Voutsis, is that:  “We believe that we can and we must have a solution and a deal within the week.”
Interestingly, he said the government was open to pushing back parts of its anti-austerity programme to make that happen.

That smacked of a willingness to compromise but weighing against that was Prime Minister Alexis Tsipras who used a column in Le Monde to say that the lack of agreement was due to “the obsession of some institutional representatives who insist on unreasonable solutions and are being indifferent to the democratic result of recent Greek elections”.

We’ve gone through weeks of claim and counter-claim. It looks like we’re in for more of the same. Athens continues to declare a deal is near and any noises to the contrary are all part of negotiating pressure.

So what do we know? Tsipras has consistently declared that any cash-for-reforms deal should include low primary budget surpluses, no cuts in wages and pensions, a debt restructuring and an investment programme.

That, its EU and IMF lenders have equally consistently made clear, is not acceptable to them. They need to at least pretend that Greece’s gargantuan debt is on a downward path to hand out more bailout money. The area for manoeuvre could be on the level of budget surplus required but that’s about it.

We also know that Greece owes the IMF 1.6 billion euros in various installments in June, a total bill that looks tough to meet. The first payment is for 300 million on Friday, which is probably coverable.

Finally, the euro zone and IMF firmly believe that there is now nothing like the contagion threat that a potential Greek exit from the euro zone posed back in 2012.

So the facts point to Greece having to cave in to secure a deal. The trouble is, after four months of talks with the new government, it is not clear Tsipras and co. grasp that and given any deal must be ratified by euro zone parliaments, which will take time, the need to strike an accord is pressing.

Germany’s Angela Merkel hosts French President Francois Hollande and European Commission President Jean-Claude Juncker for talks today. While ostensibly a business forum, Greece will inevitably be discussed.

In a phone call on Sunday with Merkel and Hollande, the second in four days, Tsipras pushed for a broad political solution which his peers are reluctant to deliver. They insist Greece must wrap up talks at the technical level with adequate concessions on reforms so that its budget and debt numbers add up.

The euro zone economy is still in modest recovery mode, not least due to the ECB’s money printing, but there are reasons to think that might wane. The backing up of government borrowing costs, a significant bounce by the euro and a climbing oil price could all curb growth.

A slew of manufacturing PMI surveys will give a snapshot of activity in Europe in May and German flash inflation for the same month will curtain-raise the euro zone figure on Tuesday which is forecast to rise to 0.2 percent, out of deflationary territory but still way below the ECB’s target of close to but below two percent.
The German figure is expected to jump to 0.6 percent.

Italian Prime Minister Matteo Renzi suffered a setback in local elections on Sunday, with a weaker-than-expected showing by his centre-left bloc and a rise in support for the right-wing Northern League and the anti-establishment 5-Star Movement.

With 22 million Italians eligible to vote in Veneto, Liguria, Tuscany, Marche, Umbria, Campania and Puglia, projections showed centre-left candidates ahead in most of the regions. The combined result gave Renzi’s centre-left Democratic Party 22.6 percent of the overall vote, ahead of the 5-Star Movement on 19.6 percent and the Northern League on 12.9.

Direct comparisons are difficult to make because of the different electorate but the PD’s performance was far down from last year’s European elections, when it scored a record 41 percent of the vote. Full results are expected today. Will they weaken the Renzi government’s ability to push through hard-won reforms?

Former French President Nicolas Sarkozy cemented his grip on the centre-right opposition party at the weekend after party members overwhelmingly approved renaming it “the Republicans”. The former French president received support from Merkel, who sent a recorded video message to congratulate him.

Six world powers – the United States, Britain, France, Germany, Russia and China – have agreed on a way to restore U.N. sanctions on Iran if the country breaks the terms of a future nuclear deal, clearing a major obstacle to an accord ahead of a June 30 deadline, Western officials told Reuters.

U.S. Secretary of State John Kerry met his Iranian counterpart Mohammad Javad Zarif for six hours on Saturday trying to overcome obstacles to a final nuclear agreement, but he then broke his leg in a bike accident on Sunday and will return to the United States.

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