Why Greece's spillover across euro area will probably be contained this time

Euro , future and oil react positively to new proposal by Greece gov.

Greek bailout proposals lift hopes of deal
VIKTORIA DENDRINOU THE WALL STREET JOURNAL JUNE 23, 2015 9:20AM


Greek PM Alexis Tsipras is welcomed at the Brussels summit by European Council President Greek PM Alexis Tsipras is welcomed at the Brussels summit by European Council President Donald Tusk, left. Source: AFP

Greece’s creditors suggested for the first time that a deal to avert the country’s bankruptcy was in sight after an 11th-hour proposal submitted by Athens made a significant concession on pension cuts.

The currency union’s finance ministers, who met overnight (AEST) ahead of a meeting of eurozone leaders, said that more work was needed to ensure Greece’s figures were in line with creditors’ demands but that talks would continue with the hope of reaching an agreement later this week.

The new offer was a potentially decisive breakthrough in the bailout negotiations after four months of fractious talks.

“Some promising things have happened, including today’s talks,” said European Council President Donald Tusk. “The latest Greek proposals are the first real proposals in many weeks.”

“We are moving towards an accord,” added French President François Hollande. “There is still work to be done ... every effort must be made so that when eurozone finance ministers meet Wednesday, a solution is in sight.”

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European stocks and bonds surged as the last-ditch proposal lifted hopes of an imminent deal. Greek shares led the way, as Athens’s main stock index closed 9 per cent higher. The pan-European Stoxx Europe 600 rose 2.3 per cent, while in the US, the S & P 500 climbed 0.9 per cent in early trading.

Greek government bonds also gained sharply, as the country’s two-year yield fell five percentage points to 22.9 per cent. The yield on Spain’s 10-year bond was down 0.21 percentage point at 2.08 per cent and the comparable Italian yield was 0.18 percentage point lower at 2.11 per cent. (Bond yields fall as prices rise.)

A first assessment from the institutions overseeing Greece’s bailout — the European Commission, the European Central Bank and the International Monetary Fund — found the new plans to be “broad and comprehensive,” said Jeroen Dijsselbloem, the Dutch finance minister who presided over the talks.

“But they really need to look at the specific to see whether it adds up in fiscal terms, whether the reforms are comprehensive enough for the economic recovery to take off again,” he said.

The two sides still have work to do to bridge remaining differences. Germany remains sceptical that Greece will pull through: at a meeting of finance ministers earlier in the day, the German minister Wolfgang Schäuble pushed to impose capital controls on the Greek economy to slow the flight of deposits from Greek banks, officials involved in the talks said. Other participants in the meeting said that step would be too drastic now.

Greece, meanwhile, is insisting that the governments offer firmer promises of debt relief as part of the deal, a carrot that would help Prime Minister Alexis Tsipras push a deal through Greece’s parliament, where leftist hardliners are a powerful force.

The Greek proposal has been described by Greek and European officials as possibly the country’s final chance to unlock its bailout program and avoid a potentially catastrophic exit from the eurozone. Negotiations between the creditors and Greece would now continue “with a view of reaching a final agreement later this week,” Mr Dijsselbloem said.

The two sides have been deadlocked over further austerity measures — particularly pension cuts and value-added taxes — that lenders say are necessary, but that Athens argues will force the country into recession.

The new proposals, formally submitted to creditors yesterday, foresee new pension savings and revenues worth 0.4 per cent of gross domestic product for this year and 1 per cent starting next year, three officials familiar with the plan said. That would bring the left-wing government in Athens close to the target demanded by its creditors.

The eurozone portion of Greece’s €245 billion rescue program runs out at the end of the month. Without a new aid transfer before then — and an extension of the five-year old aid plan — the government is set to default on a €1.54 billion payment to the IMF on June 30 and may struggle paying salaries and other government obligations. Further large payments to the IMF and the ECB loom later this summer.

Fears over Greece’s finances have prompted many Greeks to pull their savings from banks in recent weeks, with deposit withdrawals reaching €1 billion a day. Many officials expect that without a deal the government may soon have to limit cash withdrawals and transfers of euros abroad.

“The time pressure is our best friend at the moment,” said Slovak Finance Minister Peter Kazimir. “We should use the momentum.”

Ministers said a deal on new funding — if there is one — would have to wait until meetings on Thursday and Friday, when European Union leaders are already scheduled to meet again.

Mr Tsipras appeared optimistic a deal could be sealed. “We are coming here today in order to achieve a financially viable solution,” he said.

Pensions and value-added taxes, each of which the creditors insisted needed to produce extra savings or revenues of 1 per cent of GDP, have emerged as the most controversial issues in at times acrimonious negotiations.

Greek officials said that much of the pension target would be achieved by increasing contributions from employers. On top of that, an extra payment to the poorest pensioners, known as EKAS, would be phased out between 2018 and 2020, the official said.

A reliance on extra contributions rather than cuts could still prove a stumbling block, even if the overall targets are met. The IMF has warned that Greek businesses and citizens are already paying too many taxes and other levies, which it says are weighing on growth.

“The whole (thing) has to add up and guarantee debt sustainability,” said one European official. We “want our money back one day.”

The uncertainty over their country’s financial future has unnerved many Greeks. Yesterday, the ECB again authorised an increase to the emergency lending provided to Greek lenders to offset daily deposit outflows, a Greek bank official said. It was the third such increase in less than a week.

The bank official didn’t say how much more money Greek banks will have access to. “The ECB’s board of directors will meet again by teleconference whenever it is needed,” he added.

Additional reporting NEKTARIA STAMOULI

Wall Street Journal

It is an offer which creditors have a hard time to reject, under the political pressure build-up by the long negotiation...

Greek PM says ball now in creditors' court to clinch deal

BRUSSELS - Greek Prime Minister Alexis Tsipras on Monday reiterated that his government was seeking a deal with creditors that would resolve the country's financing needs, saying the ball was now in the court of European lenders to clinch one.
...
http://www.todayonline.com/business/gree...linch-deal

they may also be looking for regime change in greece

there been 20 governments in last 5 years everyone has followed austerity program all except for this one.

(23-06-2015, 10:48 AM)sgd Wrote: they may also be looking for regime change in greece

there been 20 governments in last 5 years everyone has followed austerity program all except for this one.

I always believe the "austerity" isn't a binary decision, there are many grey scale between two extreme. I am thinking the current government, might call for a referendum for the final agreement, to increase the success rate in years to come.

(sharing a view)

somebody tweeted:

Quote:Charlie Bilello, CMT @MktOutperform

Greek yields down 1.5% today. Borrowing money to pay interest on money you can never pay back. Markets love it.

8:39 PM - 22 Jun 2015

Jun 23 2015 at 3:33 PM Updated Jun 23 2015 at 3:33 PM

Let Greece go for the good of Europe

Euro crisis The Greeks should not be allowed to have their cake in the form of a sound currency and eat it as well by refusing to reform their economy. Instead they should be allowed to leave the euro and devalue as the only realistic solution to the country's problems.

Greeks protesting over the 2015 budget. The country should be allowed to default. Reuters
by Allister Heath
How long must this Greek farce continue? Even if some sort of deal is cobbled together, as the financial markets are hoping, it would merely delay the next crisis. There is no sign of any real solution, for one simple reason: the European Union is philosophically incapable of acknowledging the gravity of the economic crisis on its hands, let alone able to respond to it appropriately.

The problem goes to the heart of the EU's psychology. Its raison d'être is to grow and entrench its power, scale and scope. Most such political constructs readily engage in tactical retreats when necessary. Yet this is anathema to the EU, which has never allowed any of its member states to regain the powers previously relinquished to Brussels.

This makes it very difficult for the European establishment to accept that Greece could ever possibly leave the euro. This will almost certainly turn out to be the EU's downfall. The greatest danger to the euro is not that Greece leaves but that its rejection of economic rationality encourages other, larger states to follow suit. If Greece is able to have its cake (a sound currency) and eat it (by refusing to reform its welfare state and by relying on handouts), radicals in Spain or Italy will eventually demand the same for themselves.

Forcing Greece out of the euro would be a gamble, of course, and the markets may panic, but there is a good chance that contagion could be prevented. Allowing Greece to thumb its nose at those who try to live within their means would be far more risky.

This would also be good for the Greeks themselves, even though they would suffer in the short term. Greece must devalue its currency: that is the only way its economy can possibly bounce back.

In general, while I'm against artificial currency areas such as the eurozone, devaluations are not my favourite solution. In an ideal world, economies would be able to cope with the strictures of a strong, sound currency. Their labour and product markets would be flexible, allowing them to adjust to shocks smoothly without having to debase their currency.

FAILED EXPERIMENT

Fifteen years ago, some supporters of the euro believed governments that joined the single currency would understand this, and push through the right reforms. The loss of one kind of flexibility (devaluations) would usher in another kind (wages). There appears to have been an increase in geographical mobility across Europe but otherwise this experiment has failed disastrously.

A devaluation is thus the only realistic solution. Capital Economics has investigated how eight economies with large external debt burdens fared after their exchange rate fell precipitously following an economic crisis. The outcome was mixed, with winners as well as losers, but on balance the policy significantly improved their competitiveness. The episodes examined in the paper are Mexico (1994); Thailand, Indonesia, South Korea and Malaysia (1997); Russia (1998); Argentina (2002); and Iceland (2008). The great downside is that inflation soared in all eight cases following the devaluation, and especially during the two years that followed. Some countries, such as Malaysia and South Korea, were able to contain inflation to below 10 per cent a year, but it hit 82 per cent in Indonesia and 126 per cent in Russia, according to the Capital Economics research. Prices eventually came back under control but the damage was done.

If you are a Greek citizen with lots of cash and non-indexed sources of income, you have a great deal to lose if Greece leaves the euro.

The good news, for the economy as a whole if not for those on fixed incomes, is that this surge in inflation tends not to be enough to wipe out the extra competitiveness from the collapse in the currency. Four years after the crises and subsequent devaluations took place, real exchange rates remained 20 per cent lower in the eight countries featured in the study.

In Russia, prices soared by more than 100 per cent in the year following the 1998 economic crisis, but the rouble fell by 75 per cent, which means that on balance exports became significantly more competitive.

Economies shrank by an average of 6.5 per cent in the 12 months that followed the crises, with household consumption collapsing by 9 per cent, the Capital Economics study shows, but in seven out of eight cases they started to grow again the following year. The only exception was Iceland: its woes were so great that it took longer to start to recover. Economies that fared best, not surprisingly, were those – such as Greece – with plenty of spare capacity.

Europe's leaders need to accept that Greece cannot thrive unless its debts are written off and that this wouldn't be acceptable to other countries unless it also exited the euro. For everybody's sake, it is time to set Greece free.

AFR Contributor

Differences remain on Greek bailout plan
MARCUS WALKER THE WALL STREET JOURNAL JUNE 24, 2015 7:02AM

Greek deal not done yet
Greek pensioners take part in an anti-austerity protest in Athens. Pension cuts are amongGreek pensioners take part in an anti-austerity protest in Athens. Pension changes are among concessions offered to creditors. Source: Getty Images
Greece’s lenders are scrutinising a proposal seen as a potential breakthrough on a last-minute bailout deal, but significant concerns by more demanding creditors suggest that further days of tough negotiations lie ahead before an agreement can be clinched.

After months of virtual deadlock, officials emerged from a string of meetings in Brussels yesterday optimistic over a Greek concession on pensions. European officials hope that eurozone finance ministers can sign off on a policy package agreed to between Greece and the institutions overseeing its bailout program — the IMF, European Commission and European Central Bank — tonight or tomorrow (AEST).

“I am convinced we will find an agreement, as an agreement is now possible this week,” European Economic Commissioner Pierre Moscovici said in an interview with French radio France Inter.

But the IMF is still unhappy with key aspects of Greece’s new economic proposals and German officials were irritated by the speed with which the commission welcomed them, warning that much work needs to be done.

A summit of European leaders on Thursday night (AEST) and Friday could be the final chance to find a solution if tonight’s meeting fails.

Time is running out. Greece needs to secure financing in some form before June 30, when it is due to repay a €1.55 billion ($US1.73 billion) loan from the IMF. Europe’s part of Greece’s €245 billion bailout program also expires on that date.

The European Central Bank last night increased the emergency liquidity provided to Greek banks, for the third time in three days. Nervous Greek depositors were withdrawing deposits from lenders at a rate of about €1 billion a day late last week, though the rate slowed on Monday to between €500 to €700 million, according to bank officials.

Failure to reach and ratify a deal by the end of the month is highly likely to prompt the ECB to curtail that assistance. Such a move would force Greece to impose capital controls, dealing a severe blow to its long-suffering economy.

Markets have rallied on the glimmer of hope for a deal. In equity markets, the Stoxx Europe 600 was 1.5 per cent higher, building on Monday’s 2.3 per cent gain. Greece’s Athex Composite climbed 5 per cent.

Germany’s DAX climbed 1.4 per cent after logging its biggest one-day rise in nearly three years on Monday. France’s CAC-40 was up 1.5 per cent.

Greece’s plan calls for reducing the deficits in its pension system and government budget by relying heavily on raising taxes and social-security contributions, whereas the IMF wanted bigger spending cuts.

Greece’s government, led by the left-wing Syriza party, is finding it politically difficult to identify major spending cuts because those tend to affect key Syriza constituencies such as civil servants and pensioners. The Greek government is seeking to tap businesses and middle-class households with tax increases.

Athens has defended the billions worth of “harsh” new budget savings it has offered in talks with creditors.

“There is full comprehension that there are measures in the proposal that are harsh, and they are measures that under different circumstances, if it was up to us there was no way we would have taken,” government spokesman Gabriel Sakellaridis told private Greek television station Antenna.

The Washington-based IMF has said Greece’s economy is already too heavily taxed and that too many additional tax increases would hurt economic growth, making it harder to pay down Greece’s debt.

“It is still short of everything that should be expected,” IMF Managing Director Christine Lagarde said on Monday, suggesting Greece will have to modify its proposals significantly to win the IMF’s backing.

Some differences also remain on the details of an overhaul of Greece’s value-added taxes, where creditors have demanded increased revenue and the government is trying to limit the extent of tax increases that would hit its lower-income supporters.

IMF representatives have told European officials that they are also not satisfied yet by Greece’s broader economic overhaul plans beyond its budgetary promises. The IMF sees a wider, business-friendly shake-up of Greece’s economy as essential if the country is to improve its long-term economic growth.

Germany, the eurozone’s dominant power, made it clear during Monday’s summit that it wants the IMF to be satisfied with Greece’s economic program.

“Unauthorised personalities shouldn’t be raising some kind of expectations,” German Finance Minister Wolfgang Schäuble told reporters in Brussels, alluding to a tweet by the commission’s chief of staff, who had called the Greek proposals “a good basis for progress.”

German leaders have stressed that they won’t agree to disburse any bailout funds to Greece unless the IMF has also approved Athens’s policy package and is willing to continue lending itself.

With GABRIELE STEINHAUSER

Wall Street Journal

Divisions complicate Greece crisis talks
NEKTARIA STAMOULI THE WALL STREET JOURNAL JUNE 25, 2015 8:18AM

Greece's PM Alexis Tsipras, left, meets in Brussels with European Commission President Jean-Claude Juncker. Source: AFP

Significant divisions over measures Greece has to implement to receive much-needed bailout funds were complicating crisis talks, with finance ministers warning that a deal might have to wait until later this week.

Eurozone ministers this morning suspended a crunch meeting on Greece’s debt crisis but were “determined” to try to reach a deal in the next 24 hours.

“We have not reached agreement yet. But we are determined to continue our work towards doing what is necessary,” Eurogroup chief Jeroen Dijsselbloem said, announcing the meeting would be adjourned until tonight (AEST).

Without a new aid transfer from its €245 billion ($A356bn) bailout plan by June 30, Athens will be unable to make a €1.55 billion payment to the International Monetary Fund. A default on its international creditors — the IMF and other eurozone governments — could force Greece into a messy exit from the euro.

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“I would be positively surprised if we would get a deal tonight,” Finnish Finance Minister Alexander Stubb said earlier, as he arrived for talks with his eurozone counterparts.

Cracks have appeared in the new-found optimism sparked by a last-ditch proposal from Greece.

Creditors’ comments on the Greek plan call for reducing Athens’ proposed tax increases on businesses, doubling defence cuts, raising more from sales taxes and cutting into pension benefits rather than relying mostly on increased contributions.

But Greek negotiators “do not agree” with their creditors’ latest proposals, a Greek government source said, although adding that talks were continuing.

Greek Prime Minister Alexis Tsipras, who is in Brussels to meet with the heads of the institutions overseeing the bailout, attacked creditor demands in posts on his official Twitter account. He argued that as long as Greece introduces measures that have the same impact on cutting its deficit, the creditors should accept that.

“The repeated rejection of equivalent measures by certain institutions never occurred before, neither in Ireland nor Portugal,” Mr Tsipras said, referring to two other eurozone countries that have received bailouts in recent years.

“This odd stance seems to indicate that either there is no interest in an agreement or that special interests are being backed,” he added.

The Stoxx Europe 600 was 0.3 per cent lower in the afternoon, on course to snap a three-day rally. The index had been little-changed in early trade, but shares declined by as much as 0.7 per cent after Mr Tsipras’s comments.

Greece’s Athex Composite index was more than 2 per cent lower late in the session. In the US, the Dow Jones closed around 1 per cent lower.

Without an agreement before the end of the month, Greece is set to default on a €1.55 billion payment to the IMF on June 30.

Expectations have been growing that the creditors will unlock aid. The ECB kept lending to Greek banks unchanged yesterday at nearly €89 billion under its emergency program, according to a person familiar with the matter, as bank withdrawals by nervous Greeks stabilised.

Lending under the program, known as emergency liquidity assistance or ELA, has been rising steadily in recent days as uncertainty over Greece’s future in the eurozone sparked an outflow of deposits from its banks that reached about €1 billion per day before slowing Monday. An ECB spokesman declined to comment.

Key points of disagreement are corporate taxation, the overhaul of Greece’s pension system and value-added taxes, according to a five-page document from Greece with comments by the creditors.

For instance, Greece had planned to increase corporate taxes to 29 per cent, but in the document creditors limited the increase to 28 per cent. Creditors also don’t appear to accept Greece’s proposal to introduce a one-off corporate tax of 12 per cent on companies whose profit exceeds €500,000. These may cause new budget shortfalls that need to be plugged with other measures.

Big differences also persist in the field of sales taxation, where creditors insist on revenues worth 1 per cent of gross domestic product, compared to the 0.74 per cent proposed by the Greek government. In the document, they call for eliminating further exceptions to the highest rate of 23 per cent, for instance on catering and restaurants.

Another point of divergence is Greece’s planned pensions overhaul. The Greek government has proposed increasing revenues largely by raising social-security contributions from employers and limiting early retirement, while creditors, especially the IMF, have put more emphasis on cuts.

In the document, the creditors insist on savings worth 1 per cent of Greece’s gross domestic product by next year and also call for eliminating a supplementary payment to the poorest pensioners, known as EKAS, by the end of 2017. The Greek proposal wanted EKAS to be phased out only between 2018 and 2020.

Greece was also hoping to start implementing the pension overhauls at the end of October, but creditors changed the document to call for enactment as of from July 1. On top of that, creditors demand Greece adopt legislation that will fully offset the effects of a court ruling on previous pension cuts, which could cost an extra €1.5 billion.

The creditors also double the target Greece sets for military spending cuts to €400 million for 2016.

With GABRIELE STEINHAUSER

Wall Street Journal

this backs what I mentioned earlier that they looking for regime change in greece to either trap him or in time bring in another new government one that is "obedient" to ECB.

source: BBC

The Greek government has put forward budget proposals that it says meet the targets demanded by its creditors.

But the BBC's Chris Morris in Brussels says they include far more tax rises and far fewer spending cuts than its creditors had suggested, and the IMF in particular is refusing to accept them.

This prompted Mr Tsipras to tweet: "The repeated rejection of equivalent measures by certain institutions never occurred before - neither in Ireland nor Portugal.

"This odd stance seems to indicate that either there is no interest in an agreement or that special interests are being backed."
'Credible measures'

Our correspondent says he appears to be alluding to fears that there are those elsewhere in the eurozone who want to put the Greek prime minister in an impossible position, and engineer the collapse of his radical left-wing government.

However, IMF director Christine Lagarde said that the Greek government's tax plans were not viable.

"You can't build a programme just on the promise of improved tax collection, as we have heard for the past five years with very little result," she said in an interview for the French magazine Challenges (in French).