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Sunday, July 12, 2015 5:31 PM

Tsipras' Choice: Total Capitulation or Grexit; Text of 4-Page Eurozone Demands

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We now have "THE Final Offer Before Grexit" (I think). Of course, more offers will come after Grexit.

The Financial Times has the Four-Page Text of the Eurozone Demands on Greece.

The document is not in a form that can easily be copied. There is a line break of some sort after every character, that even my line break removal tool does not fix.

I retyped most of the document, sometimes shortening sentences or paragraphs, the essential ideas below.

Greece has Three Days to "Rebuild Trust" and Do the Following

  • Streamline VAT and broaden tax base to increase revenue.
  • Upfront comprehensive pension reform
  • Adopt Civil Procedure Code with major overhaul of civil justice system
  • Safeguard full legal independence of ELSTAT
  • Fully implement Treaty on Stability, make Fiscal Council operational before finalizing Memorandum of Understanding (MoU)
  • Introduce quasi-automatic spending cuts in case of deviation from targets after seeking advice from Fiscal Council and subject to the approval of the institutions
  • Transpose the BRRD within a week with support from European Commission

MoU Highlights

  • Carry out ambitious reforms to fully compensate for the fiscal impact of the Constitutional Court ruling on 2012 pension clause
  • Implement a zero deficit clause or mutually agreeable measures by October 2015
  • Adopt more ambitious market reforms with a clear timetable for implementation of all OECD toolkit recommendations including Sunday trade, sales periods, pharmacy ownership, milk, bakeries, ferries, etc., etc.
  • Privatize electricity network
  • Undertake rigorous reviews of collective bargaining, industrial action, and collective dismissals
  • Modernize framework for collective dismissals
  • Strengthen financial sector including decisive action on non-performing loans
  • Eliminate political interference in appointment process and governance of HFSF

On Top of That (Mish note: those were the exact words)

  • Develop a significantly scaled up privatization program with improve governance
  • Invite an independent body to assess price of assets sold with involvement of the Commission OR transfer 50 billion to an existing external and independent fund like the Institution for Growth in Luxembourg to be privatized over time to reduce debt.
  • Modernize and significantly strengthen Greek administration and put in place a program under the auspices of the European Commission, a capacity-building and de-politicization of the Greek administration. The first proposal needs to be provided by July 20.
  • To fully normalize working methods with the institutions, the government needs to consult and agree with the institutions on all draft legislation before submitting to parliament or the public. The Eurogroup stresses implementation is the key and welcomes Greek authorities to request by July 20 support for technical assistance.
  • Amend or compensate for "roll-back" legislation adopted during 2015 that is counter to the framework of the February 20, 2015 Eurogroup statement.

Minimum Requirements

The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities. However, the Eurogroup made it clear that the start of negotiations does not preclude any final possible agreement on a new ESM programme, which will have to be based on a decision on the whole package (including financing needs, debt sustainability and possible bridge financing).

Mish comment: the above sentence was retyped exactly as written.

Additional Financing Needs

The Eurogroup takes note of the possible financing needs of between €82 billion and €86 billion. The Eurogroup notes the urgent financing needs of Greece and the need for very swift progress in reaching a decision on a new MoU: Estimated amounts are €7 billion by July 20, and an additional €5 billion by mid-August.

Additional Bank Recapitalization Buffer

Given the accute challenges of the Greek financial sector, a new ESM would have to include a buffer of €10 billion to €25 billion for bank recapitalization, of which €10 billion would immediately be available in a segregated account at the ESM.

No Haircuts

  • The Eurogroup stresses that nominal haircuts on debt cannot be undertaken.
  • The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.
  • Provided all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM board of directors may mandate the institutions to negotiate a new ESM programme.

Capitulation or Grexit

In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring.

End of Document

Bloomberg sums it up this way: EU Demand Complete Capitulation From Tsipras.

German chancellor Angela Merkel had her choice, and she made it.

Merkel's 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.

Merkel selected option number 2. This pushed the ball in Tsipras' court.

Tsipras' Choice

  1. Go back against everything he vowed to do and completely give in to Germany, accepting a far worse offer than he had weeks ago
  2. Grexit

Mish Analysis

This proposal is in ways a step in the right direction. Indeed France would benefit greatly if it had to adopt the best of the ideas: loosen work rules, make it easier for businesses to fire employees, reduce state spending, increase retirement age, undertake rigorous reviews of collective bargaining, and fully implement the treaty on stability.

Ironically, not even Germany fully implements the treaty on stability. Instead, the previous two bailout agreements relied on massive VAT hikes with no real reforms.

Greece imploded.

Note that even if Greece does everything asked, the agreement above does not lead to a guaranteed ESM restructuring.

Here is the exact sentence (emphasis in italics mine): "Provided all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM board of directors may in accordance with article 13.2 of the ESM Treaty, mandate the institutions to negotiate a new ESM programme, if the preconditions of Aricle 13 of the ESM treaty are met on the basis of the assessment referred to in Article 13.1"


If Greece meets the all Eurogroup demands (and the document allows more to come), then if the preconditions in article 13 are met,  then the ESM committee may (or may not), tap the ESM.

Meanwhile, Greece is told that no nominal haircuts are coming.

Tsipras' Clear Choice

The wording of this document makes it clear Germany wants to push Greece out of the eurozone.

Please review the final sentence of the proposal. Here it is again: "In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring."

If Greece turns down the offer, it gets "swift" negotiations on a "temporary time out", including the possibility of restructuring.

In contrast Greece has no chance of restructuring if it accepts all of the above demands.

Tsipras would be a fool to accept this proposal.

As I have said all along, Greece's best chance is to default, not pay back a cent, and initiate the reforms it needs to grow over the long haul. 

Greece does not need the euro. No country does.

Mike "Mish" Shedlock

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