Testing times for Greek gov’t as pressure mounts

The recent decision by the Council of State concerning the TV license auction has piled political pressure on the coalition, which also has to face the eurozone’s unwillingness to discuss debt relief, as well as the strict stance of the country’s lenders on the second bailout review.

The verdict of the country’s highest administrative court that the government’s law for restructuring the media is in violation of the Greek Constitution damaged the coalition’s credibility regarding its pledge to fight corruption.

In the meantime, the creditors have rejected Prime Minister Alexis Tsipras’s promise to protect indebted Greeks’ bank accounts from seizures and a universal debt settlement scheme for households, self-employed individuals and corporations, while the first round of talks for the second review was concluded without any agreement on Thursday.

All of these issues have cast doubt on whether the expected cabinet reshuffle will have the desired results. Tsipras had been hoping to use it to revive his government’s flagging image and lead to the next step of the economy’s recovery, which includes making Greek bonds eligible for the European Central Bank’s quantitative easing (QE) program.

The Greek premier has admitted that there was no progress in talks on debt relief on the sidelines of the last EU summit. Therefore his government needs to focus on QE by concluding the second review as soon as possible. Tsipras needs this to send a positive message and offset the tough measures of the current memorandum and those that will arise from the second review.

The government’s original plan anticipated a conclusion of the second review on October 27. However, the key milestone has been moved to December 5, when the Eurogroup will convene. If the Eurogroup approves the second review, this will pave the way for Greek bonds to be included in the QE program, providing some relief to the economy and boosting the government’s popularity.

Moreover, the government believes that a negative outcome with regard to debt relief during the second review should not reduce Athens’s efforts toward the implementation of the program, and it plans to bring up the debt issue again during the Mediterranean Summit on January 28-29 in Lisbon.

Risks

Tsipras’s plans for a reshuffle, as well as the expectations for a positive program review and QE are at risk. Let’s take a look at some facts: First, it will be very difficult for the International Monetary Fund and the eurozone to reach a compromise on the Greek debt by the end of the year. Second, the IMF and the ECB will conduct their own, separate debt sustainability analyses. Third, the ECB has undertaken action behind the scenes to broach a compromise between the IMF and the eurozone, which would effectively require Germany to change its position.

Greece believes that if the country meets all its obligations and concludes the second review in time, the outcome of the ECB’s debt sustainability analysis will be positive and open the door for the bank’s Governing Council to include Greek bonds in its QE program. In this case, Greece will be able to access markets, liquidity will increase and the Greek economy’s credibility will start to recover.

However, it is our opinion that there are many technical and political risks in the above scenario.

According to the plan, the ECB’s debt sustainability analysis will be conducted in December, a month before the IMF’s. There are serious political and credibility risks if the ECB considers the Greek debt sustainable but the IMF does not. In this case, the eurozone’s credibility and the supervision of the bailout program (as well as the IMF’s participation as a technical advisor) will be weakened.
Second, the IMF and the eurozone may delay the conclusion of the second review, making the ECB’s debt sustainability analysis irrelevant. Third, the IMF and the eurozone are aware of the ECB’s alternatives: The ECB might approve QE for Greece without the prior full conclusion of the second review or a positive debt sustainability analysis by the IMF, or the ECB will take into account its own analysis and/or Greece’s ability to access markets.

This scenario contains the following difficulties: If the review is not concluded, no solution for the debt is found and the IMF’s debt sustainability analysis is not positive, then the ECB will recommend that Athens issue new debt in early 2017. By issuing a small debt, Athens will be able to access markets and show investor confidence. With this move, the ECB will try to disconnect a decision for QE from the second review, as well as the IMF’s debt sustainability analysis and its contribution to the program. This scenario may be convenient for the IMF and Germany, because the IMF will not contribute to the program and QE will help Greece to finance its needs, making additional eurozone assistance unnecessary.

However, this solution would come at a heavy political cost for Greece, because it would entail:

– Athens reaching an agreement with the troika for the medium-term financial adjustment program (fiscal targets for the next five years, including the targets for the primary surpluses).

– Hard reforms in the labor market (legislation changes for dismissals in the private sector, new minimum wages, curbs on unions and strikes etc).

– Full establishment of the new privatization fund.

Furthermore, if the lenders foresee SYRIZA’s popularity deteriorating and a new government led by New Democracy emerging soon, they will likely delay the negotiations and the review until the current coalition collapses.

In our opinion, Greece will not make any progress on its debt or QE unless a preliminary compromise is achieved between the IMF and the eurozone, even if unofficial. Alternatively, the ECB will force Athens to adopt hard reforms for it to allow Greece to join its QE program.

The bottom line is that the future of the second review and the benefits to the Greek government are related directly to the relationships between the IMF and the eurozone.

Geopolitical factors

Beyond the technical and political factors in the Greek debt issue, a major issue is geopolitical developments linked to the US elections and the plans of the big players in the broader Eastern Mediterranean region.

The facts at the moment are that the US is mainly focusing on its elections, Turkey and Russia are becoming major players in the region, developments in Syria are helping Turkey and Russia’s plans, and Turkey sees Athens as being unwilling to put pressure on Cyprus for a compromise to the Turkish-Cypriot issue. Moreover, a change in the map regarding Syria may raise doubts about borders in general and put pressure on Greece with regard to Thrace and the Eastern Aegean islands, as Turkey’s president, Recep Tayyip Erdogan, and the Turkish media are already (directly or indirectly) challenging borders, the force of international treaties etc.

Other factors at play are the weakening of Iraq, the possibility that the Kurdish issue may destabilize Greek-Turkish relations, the roles that key players (the US, the eurozone, Russia and Turkey) would pursue in the broader region, and the fact that the US will most likely participate in this game following the elections, regardless of the outcome.

Impacts

We cannot ignore the IMF’s role in the US-eurozone relationship or the eurozone’s stance vis-a-vis Greece on a series of issues such as energy and the refugee crisis, particularly as regards Greece and Turkey.

Another factor to consider is uncertainty in the eurozone. Starting with Italy’s referendum and ending with Germany’s elections next year, we can see that negotiations with the UK over Brexit will be fraught. Thus, Europe (and the eurozone) is expected to avoid increasing uncertainties by creating delays and problems in the Greek bailout. While this is considered very rational, the stance is not shared by all EU and eurozone members, though it is supported by US diplomacy. In our understanding, the US prefers cooperation so that the new rules will be rewritten in favor of American and eurozone interests, not Russian interests. Also, Turkey would be better controlled by the US and the eurozone rather than Russia.

In this context, we cannot see the above developments not having an impact on the Greek review, the IMF’s decisions, the Greek debt, reforms in the energy market, or the creditors’ willingness to take the risk to help or destabilize Tsipras.