Monday, February 16, 2015

Greek Stalemate Continues

Despite the optimism expressed late last week, talks between Greece and the other EU Finance Ministers broke off after only four hours today.  The talks had been expected to run well into the evening, but were deemed pointless after Greece flatly rejected the EU proposal of a six-month extension to the bailout.  The effect on the markets tomorrow is uncertain, and we'll be watching the Asian markets overnight for some indication as to how US equities and bond markets will react.  (US markets were closed today for Washington's Birthday, known popularly as Presidents' Day.)

The next major milestone in the sage will come on Wednesday.  That's when the European Central Bank (ECB) will decide whether or not to continue their emergency lending program to Greek banks.  Without that program, Greek banks have less than 14-weeks of solvency remaining.  They are hemorrhaging deposits at the rate of over €2 Billion  ($2.27 Billion) per week. In just three months, the banks will not have the collateral needed to obtain loans from the Central Bank, although the real crunch will come in late March when Greece faces some heavy loan repayment requirements.

Part of the problem appears to be a question of semantics.  Greece is willing to accept "six months of credit" however they will not accept a six-month extension of the bailout.  Economics Commissioner Pierre Moscovici expressed his frustrations, saying "We need more logic and less ideology."  The EU officials were dismayed last week by what they portrayed as a total lack of preparation on the part of the Greek finance ministers, and they question whether or not the young government understands the seriousness of the situation.  For now, the EU feeling is that Greece is putting political concerns ahead of the dire economic needs facing the nation.

The ball appears to be in Greece's court since several ministers were quoted as saying that further talks would require Greece to request a bailout.  A separate but equally contentious issue remains over the austerity programs that were tied to the original bailout.  Greece is on record as proposing a halt to those austerity programs as part of any new agreement, however the EU - especially Germany, their largest creditor - wants none of that.  According to German Finance Minister Wolfgang Schaeuble, Greece has "lived beyond its means" for a long time.  Neither Germany nor the rest of the EU are willing to continue to provide bailout funds without proof that Greece has learned to manage its debt.

Polls in Greece appear to put some pressure on the young leftist government to reach a compromise.  68% of Greeks seek a fair compromise, while only 30% advocate standing firm against the EU.  An astonishing 81% want Greece to stay on the Euro.

There is growing fear that the failure of the debt talks will lead to the imposition of strict capital controls.  There's precedent for that.  In 2013, Cyprus was forced to close the banks for two weeks while capital controls could be introduced.  With the Greek banks closed next Monday for the first day of Lent in the Orthodox Church, there's fear that the ECB could impose such restrictions as early as next week.

For now, it's back to the game of brinkmanship.  With an inverted yield curve and the yield on short-term Greek bonds now in the upper teens, time is not on Greece's side.  They are facing the total collapse of their banking system in a matter of weeks, and the only bargaining chip left in their arsenal is an agreement to remain in the Eurozone.  The further this goes, however, the less valuable that chip will become.  With the Greek banks losing close to €300 Million per day, the prospect of terms favorable to Greece are diminishing by the hour.  

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