MacroScope

Some key positions were staked out on Greece over the weekend – ECB power-behind-the throne Joerg Asmussen became the first euro policymaker to say on the record that euro zone finance ministers meeting on Tuesday would be intent only on finding a deal to tide Greece over the next two years. But IMF chief Christine Lagarde told us in an interview that she would push for a permanent solution to Greece’s debts to avoid prolonged uncertainty and further damage to the Greek economy.
  
Sounds like those two positions could be mutually exclusive. However, it may be that something like a behind-the-scenes pledge from the German government that it will act decisively after next year’s election will keep the IMF on board.

Eurogroup chief Jean-Claude Juncker said at the weekend that intensive work was being done on a compromise with the IMF and progress was being made, after the euro zone sherpas put their heads together on Friday. And even hardline German Finance Minister Wolfgang Schaeuble said a deal had to be struck on Tuesday and would be. Juncker and Lagarde clashed last week over his suggestion that Greece should be given an extra two years, to 2022, to get its debt/GDP ratio down to 120 percent, the level the IMF has decreed is the maximum sustainable. Lagarde looked surprised and firmly rejected the idea.

IMF officials have argued that some writedown for euro zone governments is necessary to make Greece solvent but Germany has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal. 
Among ideas under consideration to plug the funding gap are further reducing the interest rate and extending the maturity of euro zone loans to Greece, a possible interest payment holiday and bringing forward loan tranches due at the end of the programme, according to euro zone sources.

Asmussen said loans alone did not help as they raised the long-term debt and that a solution had to be found that did not raise Greece’s debt level. It sounds increasingly like the ECB, which could forego profits it has made on its Greek bondholdings worth 12 billion euros or more and allow that to be thrown into the Greek pot (or should I say urn), is prepared for euro zone governments to take a loss on their  bondholdings. But it can’t countenance doing the same itself.

Even hardline Bundesbank chief Jens Weidmann said late last week that a new haircut of Greece’s debt could come as a reward for Athens implementing the reforms it has signed up to. Klaus Regling, the head of the euro zone’s rescue fund, also left more wiggle room than the German government has, saying a haircut could only happen in “exceptional circumstances”.

The Greek government pulled it off last night, winning parliamentary approval for an austerity package which offers yet more deep spending cuts, tax rises and measures to make it easier and cheaper to hire and fire workers. But boy was it tight. With the smallest member of the coalition rejecting the labour measures, Prime Minister Antonis Samaras carried the day by just a handful of votes. The overall budget bill is expected to be pushed through parliament on Sunday.

So the show remains on the road and this government has shown more resolve than its predecessors which may buy it some goodwill from its lenders. Attention today turns to the monthly policy meeting of the European Central Bank, a key player in negotiations to put Greece’s debts back on a sustainable path.  Mario Draghi could well rule out taking a haircut on the Greek bonds it holds, something the IMF has pushed it and euro zone governments to do but which Germany and others won’t countenance.  However, the ECB could forego profits it has made on Greek bonds it bought at a steep discount. Those profits have to be funneled through national euro zone central banks and would only be realized when the bonds mature but it would still help.

Greece is set to get two more years to make the cuts demanded of it and EU economics chief Olli Rehn told us yesterday that lengthening the maturities on official loans to Greece and lowering interest rates on them could be done but a haircut was out. There is the possibility of a meeting of the Eurogroup Working Group (the expert officials who prepare for euro zone finance ministers’ meetings) but it seems less likely that a deal will be struck at next Monday’s Eurogroup meeting, with officials now giving themselves until the end of November to come up with something. There were suggestions that Washington had urged big decisions to be put off until after the presidential election. True or not, that roadblock is now out of the way.

With Spain content to sit on its hands for now (European Central Bank policymaker Nowotny highlighted the status quo on Sunday, saying Madrid is fully financed for the rest of the year), Greece and Italy will hold the euro zone spotlight for the next few days.

Yesterday, we reported that the EU and IMF have refused to offer any further concessions on the labour reforms they are demanding and which one party in Greece’s ruling coalition refuses to countenance. The government could just about carry a vote in parliament without the support of the Democratic Left but it would only take a handful of rebels within the New Democracy and PASOK parties to turn the tables. So we’ve got another standoff. The bill is due to go to parliament next week.

With the debt numbers clearly not adding up, more money – up to 30 billion euros –  is going to be needed, be that via lower interest rates and longer maturities on loans and/or a writedown on Greek bonds held by the ECB and euro zone governments. Athens looks set to get the extra two years it requested to make the cuts demanded of it.