Latest Proposal "May Provide" Negotiation Basis; Greece Needs €80+ Billion; Doubters, Haircuts, Temptation; Merkel's Choice

First Hurdle Cleared

In an emergency Saturday meeting, eurozone finance ministers have concluded that "under certain conditions", the latest Greek bailout proposal "may provide" a basis for negotiation.

Greece requested another €53.5 billion, but the IMF said that would not be enough. An additional €30 billion or so would be needed to recapitalize Greek banks.

Should the offer go through without haircuts, Greece would then have to pay back over €400 billion counting Target2 liabilities. 

Germany and other hard-liners including Ireland remain skeptical. Nonetheless, Greece Clears First Hurdle to Avoid Grexit.

Greece has cleared the first hurdle in its attempt to stay in the eurozone after the bloc’s bailout monitors gave the go-ahead for negotiations over a future rescue programme.

The so-called “institutions”, which consist of the European Commission, European Central Bank and IMF, said that the Greek proposals could be a “basis” for a new bailout programme under “certain conditions”, according to two officials.
 
These conditions include clearer and more detailed targets on things such as opening up Greek professions, according to EU officials.

An EU diplomat said: “Under certain conditions, they jointly see the proposals as a basis for negotiating an ESM programme.” Any proposals must first be examined by the European Commission, the ECB and IMF, formerly known as the troika.

Greece put forward a host of reforms earlier this week as part of a bid to receive a third bailout worth €53.5bn over three years. Greek lawmakers overwhelmingly backed the proposals in a late-night session in Athens on Saturday morning, with pro-EU opposition parties coming to the government’s aid after a rebellion.

EU officials warned on Friday that the Greek proposals did not include the cash needed to recapitalise the country’s struggling banking sector, meaning that the total bill could reach more than €80bn.

Officials in Paris had welcomed the Greek proposals, with French president François Hollande labelling them “serious and credible”.

The Doubters

• Germany: Martin Jäger, a spokesman for the German finance ministry said Greece needed to do more. "It would not be enough to present the proposals from the end of June in new packaging."
• Austria: Hans Jörg Schelling, Austria's finance minister, said the minimum Greece had to do was for parliament to start work on reform legislation and pass the relevant laws within two weeks so that implementation could then begin.
• Ireland: Irish finance minister Michael Noonan urged the Greek government to introduce the legislation for reforms sooner rather than later, as the Syriza-led coalition shows signs of fracturing. “They may not have the capacity to implement the measures as time goes by,” warned Mr Noonan.

The Haircut

Greece cannot pay back the €326+- billion or so that it owes right now, so how the hell can it pay back €400 billion without a major haircut?

The answer of course, is that it cannot and will not. Yet, the amazing propensity to kick the can further appears insatiable.

The Temptation

With every bailout, the default stakes rise. Once again, if and when Greece goes into a primary account surplus, the temptation to flat out default would be extremely strong.

In a primary account surplus situation, defined as having enough revenue to cover bills except for debt payments and interest, nothing could force Greece out of the eurozone were Greece to default.

Right now, Greece does not have a primary account surplus, and Greek banks are not strong enough to default and stay in the eurozone.

The clear temptation will be to "take the money and run".

The Troika will attempt to place controls to prevent such an action, but once Greece is strong enough, and has a big enough primary account surplus, nothing can stop Greece should it choose that action.

Ironically, one of the unspecified conditions will no doubt be that Greece runs a primary account surplus. Greece needs that surplus to pay back creditors. But once it has that surplus, Greece may very well decide to spend the money on itself.

Merkel's Choice

German chancellor Angela Merkel has a no-win, unpleasant choice.

1. Pony up another €80+ billion to Greece and offer debt relief on top of it, even though a majority of German voters would rather see Greece out of the eurozone.
2. Push Greece out of the eurozone.

OK chancellor, which is it?

Addendum

As soon as I penned the above, it seems we have a better definition of "certain conditions".

Germany wants Greece to put up €50 billion in collateral, likely state owned businesses and islands, no doubt at discount prices.

Ministers Demand More

Reuters reports Eurozone Ministers Demand More From Greece for Loan Talks.

Skeptical euro zone finance ministers demanded on Saturday that Greece go beyond painful austerity measures accepted by Prime Minister Alexis Tsipras if he wants them to open negotiations on a third bailout for his bankrupt country to keep it in the euro.

Ministers lined up to vent their anger at Tsipras on arrival at their umpteenth emergency weekend meeting on Greece's acute debt crisis, with Athens staring into an economic abyss when financial markets reopen on Monday unless it wins fresh aid.

Wolfgang Schaeuble, finance minister of its biggest creditor Germany and a stickler for the EU's fiscal rules, said negotiations would be "exceptionally difficult".

Emerging optimism about Greece had been "destroyed in an incredible way in the last few months" since Tsipras won power, Schaeuble said.

A German newspaper reported that his ministry was suggesting that Greece either improve its proposals quickly and transfer state assets worth 50 billion euros into a fund to pay down debt, or take a five-year "time-out" from the euro zone.

The German Finance Ministry declined to comment on the report in the Frankfurter Allgemeine Sonntagszeitung. But several officials said no one raised the possibility of a Greek euro exit in the meeting, which took a pause after three hours.

"We are still far away," said Jeroen Dijsselbloem, the Dutch finance minister who was chairing the meeting. "On both content and the more complicated question of trust, even if it's all good on paper the question is whether it will get off the ground and will it happen ... We are facing a difficult negotiation."

Finland's state broadcaster YLE reported that the Finnish government had told parliament's influential Grand Committee on Saturday it did not consider the Greek proposal sufficient to start negotiations on a new loan. The government declined comment. Helsinki's stance has hardened since the populist Finns Party joined a right-wing coalition that took office in May.

Germany, the biggest lender in two previous bailouts totaling 240 billion euros ($265 billion) since 2010, is deeply skeptical and public opinion is hostile to any further aid for Greece, putting pressure on Chancellor Angela Merkel.

"The high figures for financing needs over the next three years may be too high and too sudden," one euro zone source said. He said officials believed Greece may need 82 billion euros, factoring in cash from the IMF and other EU sources.

It Only Takes One

Eurozone rules demand unanimity.

One nation alone can defeat an agreement. If Germany, Finland, or the Netherlands refuse to go along, or if  hard-liners insist on collateral or other terms unsuitable to Greece, this deal is dead.

Germany may easily decide to concoct with Finland and the Netherlands, conditions that it knows will be unacceptable to Greece.

Schaeuble will likely push for that outcome, further enhancing the difficulty of Merkel's choice.

 Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com