“Greece On The Verge Of A Precipice” As A “Lehman-Like” Avalanche Could Be Set In Motion As Soon As Sunday
by Tyler Durden
Keeping a track of all the fluid, hourly changing developments in Greece can be unbearably complex, and as a result one may be left with the impression that things are better than they really are. They aren’t. As the SocGen report below summarizes, Greece may have about 72 hours before it gives itself a Pass/Fail grade on Sunday, which in turn will have massive repercussions on the Troica bailout, on the eurozone, on the EUR, and on all those “Lehman-like” consequences you have been reading about. Once again, just like 2000 years ago, the fate of the western world (we would say democracy but that has not been the case for centuries), is about to be decided by a few popularly elected parliamentarians in Athens.
Greece: One step closer to the precipice
Greece’s sovereign crisis has reached a critical phase, and the likelihood of a disorderly outcome has risen dramatically in the last 48 hours.
Two-year Greek bond yields breached the 30% mark, while Irish and Portuguese yield spreads reached one-year highs.
In the meantime, Greek economic and fiscal data continue to disappoint, and public discontent is rising in the face of the human costs of an ever deeper economic downturn.
Against this backdrop, the backlash from yet more austerity has triggered a severe blow to the ruling Government. The catch is that the Government needs to approve the Medium Term Fiscal Plan for EU/IMF funding to be disbursed. This is looking challenging as the survival of Papandreou’s government hangs on a formal confidence vote on Sunday, and two more defections from the ruling PASOK party on Thursday depleted its majority even further.
Given these unexpected complications, the IMF is now reportedly ready to release its next quarterly instalment to Greece purely on the basis of assurance of EU funding rather than on formal conditionality, paving the way for the €12bn July tranche being disbursed. Olli Rehn stated that the deal on this payment should be forged at this Sunday’s meeting in Luxemburg.
However, even assuming that the domestic political hurdle is cleared and the €12bn loan is issued, the divide between German and French positions on private sector burdensharing is unlikely to be resolved immediately, and so the uncertainties about Greece’s longer-term funding seem destined to persist.
Indeed, the degree of private sector involvement will have a material impact on Greece’s funding needs. The IMF estimates that Greece’s financing need for the next three years amounts to €144bn in the absence of private sector involvement, but it would fall to €120bn with a “voluntary” rollover, and to around €90bn with an outright maturity extension. Ultimately, we continue to see a Vienna-style initiative as the most palatable compromise.
Politics: Irish parallel