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Wednesday, February 18, 2015 2:14 PM

Greece Has Less Than One Week of Cash; Another DOA Proposal Discussed Thursday; Exceptional Game Playing

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Another DOA Greek Proposal Discussed Thursday

It's likely make-or-break for Greece in the next two days.

Tomorrow the Eurozone to Weigh Greek Bailout Proposal, but it already appears it's no different from previous proposals.

There will be no meeting on Friday if Germany rejects this one up front.

Officials from 19 eurozone governments will meet in Brussels on Thursday to examine a request from Greece to extend its €172bn rescue programme but there were already signs the proposal would be rejected.

If Athens’ eleventh-hour request is rejected, officials said it was hard to see how Greece could be kept in an EU bailout programme after it expires at the end of next week. That would leave the country without emergency EU funding for the first time since the start of the eurozone crisis in May 2010 and raise the possibility the Greek government could run out of cash as soon as next month.

Several officials said they still had to see the request before passing judgment; if Thursday’s meeting of the so-called euro working group concludes the proposal is a step forward, a meeting of finance ministers would probably be held on Friday.

In Berlin, Martin Jäger, the finance ministry spokesman, said any request that did not include a commitment to complete the terms of the current bailout would likely be unacceptable, and other German officials said a proposal based on EU Economic Affairs Commissioner Pierre Moscovici's plan — which Greek ministers have indicated would be the framework for their request — would also fail to pass muster.

“We’re prepared to discuss an extension, but only if the Greek side has the clear intention to complete the programme,” said Mr Jäger.
Major Points of Disagreement

  • Greece accepted Moscovici's plan, but Germany rejected it. In fact, Germany has pretty much rejected every compromise to date.
  • Instead of running a primary surplus - a budget surplus before interest payments - of 3 per cent of economic output this year and 4.5 per cent in 2016 and 2017, the Athens proposals says it is committed to a surplus of 1.5 per cent. Germany will bend no further than 3 percent.
  • Instead of counting on the €2.2bn in privatisation receipts in 2015, Athens suggests using €1.9bn in Greek bond profits held by the European Central Bank to pay down debt instead. This is a no-go for Germany and the ECB.
  • Greece estimates a windfall of €5.5bn from tax reforms, including cracking down on evasion and raising taxes on the wealthy. However, a separate submission also suggests writing off about €70bn in unpaid penalties against taxpayers who have been late meeting their bills.

Less Than One Week of Cash

The Financial Times said the "Greek government could run out of cash as soon as next month." In contrast, Ekathimerini says "Feb. 24 to be the First Crunch Day for Greek State Coffers.
The state of cash reserves – not robust before – has deteriorated further in recent days due to a shortfall in revenues, as a 1-billion-euro hole in January revenues is putting the execution of the state budget in jeopardy and hampering the management of cash reserves.

According to figures released yesterday by the Bank of Greece, in January the net cash result of the central administration posted a deficit of 217 million euros, against a surplus of 603 million in January 2014. Budget revenues reached 3.1 billion euros, against 4.4 billion in January 2014, while expenditure dropped to 3.2 billion from 3.6 billion last year.

Given these figures, the Finance Ministry estimates that cash reserves will run out next Tuesday. It has the option, however, of using the reserves of general government entities kept in commercial banks in order to cover short-term needs next week. However, the problem that cannot be addressed as things stand concerns needs for the first week of March.

Unless something changes drastically to the country’s funding, Greece will not be able to fulfill all of its March obligations.

Finance Minister Yanis Varoufakis had called on the European Central Bank to increase the limit of treasury bills to 23 billion euros from the current 15 billion in a bid to address this shortfall. The additional funds would have covered the state’s short-term obligations while also providing a cushion until the Greek government is able to strike a deal with its eurozone partners.

The request, however, was rejected, as the ECB deemed it an act of direct monetary funding: In practical terms the European Central Bank would have been financing the obligations of a state, which contravenes its regulations.

I discussed the debt timeline in Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited.

Key Dates

Where Can Greece Get €11 billion?

Between March and August, Greece needs to come up with €11 billion. From where?

Greek revenues have plunged badly because Greek citizens reacted in advance of Syriza's victory and Tsipras' pledge to cut some taxes.

The immediate concern is March. And if Ekathimerini is correct, there is a minor crunch on February 24.

Exceptional Game Playing

Unless Greece (or Germany) bends dramatically in the next 24 hours, there will not be a meeting on Friday.

Greece is playing its cards exceptionally well. Syriza has overwhelming support from its citizens on its handling of the crisis.

Assessing the Collateral Damage on Europe

Assume Greece intends to default. Here is a table that shows who will not get paid back.

IESEGBilateral loansGuarantees on the borrowings of EFSF to fund its loansImplicit share of TARGET2 claims of the EurosystemImplicit share in the SMP holdings of bonds by the EurosystemTotal

The above table from Exposure of European Countries to Greece by Dr. Eric Dor, IESEG School of management.

Exposure of European Banks

The exposure of European banks to Greek public and private debt is most interesting.

Nearly all the liabilities have been shifted from banks to the public. For example the exposure of German banks to the Greek public sector is now limited to $181 million.

German Bank Claims on Greek Public Sector

The exposure of French banks to the public sector of Greece is now limited to $102 million.

French Bank Claims on Greek Public Sector 

The exposition of European banks to the private sector of Greece excluding banks is also very limited, even if it recently increased for German banks, for which it amounts to $7.885 billion.

The exposure of German banks to Greek banks amounts to $5.702 billion. Their other potential exposure to Greece amounts to $2.912 billion in the form of derivatives, guarantees extended and credit commitments.

German Bank Claims on Greek Private Sector

The exposure of the French banks to the private sector of Greece excluding banks is limited to $1.646 billion.

French and German banks dumped their exposure to Greece on to the public by dumping assets and also via the EFSF.

  • German taxpayers are responsible for $41.3 billion via the EFSF, with Target2 liabilities of another $11 billion.
  • German taxpayers are responsible for $31 billion via the EFSF, with Target2 liabilities of another $8.7 billion.

Bluff or Not

Germany says the eurozone is prepared for default. Is it? Banks may be, but what about the EFSF. Of course that money will trickle in for decades, at public expense.

But what if Italy or Spain decided to do the same?

100% of Blame on Germany

If negotiations fail, 100% of the blame will go to Germany. It has rejected every meaningful compromise.

I propose Greece is far better off defaulting than running a surplus of 4.5% of GDP for decades until it can pay back over €300 billion in debt.

The best case scenario for Greece is to default but stay on the euro. To do that, Greece will need to run a primary account surplus.

For now, Greece needs to do the right thing: tell Germany to go to hell, then default. If it succeeds, Spain will follow.

Mike "Mish" Shedlock

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