22 Feb 2015
Greece loan deal only a 'small' step - Deutsche Bank
FXStreet (Bali) - George Saravelos, Strategist at Deutsche Bank, notes that despite the deal reached by Greece and the EU to extend the current bailout agreement for another 4 months, this only means a small step, adding that it remains unclear how Greece can navigate between the commitments to Europe with domestic political demands.
Key Quotes
"First, it remains unclear how the Greek government will be able to finance itself through the duration of the negotiations. Finance minister Varoufakis confirmed after the meeting that the government's cash position is tight, but funding will not be disbursed until after a final agreement is reached. Unless the Eurogroup approves increased t--bill issuance, there is a risk that the negotiation timeline will have to be accelerated to March, by which time the government's cash position will have been likely run down. Eurogroup chair Dijselbloem was unclear when asked on this point during the press conference, but as things stand our baseline is that the Eurogroup is unlikely to approve additional t--bill issuance unless significant progress is being achieved in the negotiations over March -- Dijselbloem mentioned the need to create "trust" multiple times in the press conference."
"Second, the terms and conditions under which the ECB is willing to fund the Greek banking system also remains unclear. Press reports after the Eurogroup suggested that the ECB would allow Greek bank funding to shift back to the main refinancing operations "once it assesses that the program is likely to be concluded", but we believe it is too early for this to materialize next week. Similarly to t--bill issuance, our baseline is that the government will have to demonstrate significant pressure in the negotiations to allow the waivers on Greek bank collateral to be re--instated."
"Third, and by far most importantly, the Greek government's capacity to agree and deliver on the conditionality of the current program remains the key source of uncertainty under the current agreement. Greek press already reports meaningful disgruntlement from within the rank and file of the SYRIZA party on the current agreement, with any pushback likely to be led by Panagiotis Lafazanis, leader of the powerful "Left Platform" within SYRIZA and current head of the important Environment and Energy ministry. Most immediately, the government will have to navigate the fallout from today's agreement, as well as the "reform list" that will need to be submitted on Monday. To name but one example, the Greek Prime Minister earlier this week announced that he would imminently submit to parliament a labor market re--regulation bill, something that is unlikely to be approved by the institutions. On a more forward—looking basis, it is likely that the government will have to agree to fresh revenue generating measures: even with a downward adjustment to this year’s fiscal targets: budget execution for this year is meaningfully off—track."
"To summarize, Europe was finally able to achieve progress this evening. But the road ahead remains long, and it remains unclear how the current government can navigate between the commitments it has made to Europe with competing domestic political demands – both internally within the SYRIZA party as well as with t the electorate. A small step has materialized, but the hard work is about to begin."
Key Quotes
"First, it remains unclear how the Greek government will be able to finance itself through the duration of the negotiations. Finance minister Varoufakis confirmed after the meeting that the government's cash position is tight, but funding will not be disbursed until after a final agreement is reached. Unless the Eurogroup approves increased t--bill issuance, there is a risk that the negotiation timeline will have to be accelerated to March, by which time the government's cash position will have been likely run down. Eurogroup chair Dijselbloem was unclear when asked on this point during the press conference, but as things stand our baseline is that the Eurogroup is unlikely to approve additional t--bill issuance unless significant progress is being achieved in the negotiations over March -- Dijselbloem mentioned the need to create "trust" multiple times in the press conference."
"Second, the terms and conditions under which the ECB is willing to fund the Greek banking system also remains unclear. Press reports after the Eurogroup suggested that the ECB would allow Greek bank funding to shift back to the main refinancing operations "once it assesses that the program is likely to be concluded", but we believe it is too early for this to materialize next week. Similarly to t--bill issuance, our baseline is that the government will have to demonstrate significant pressure in the negotiations to allow the waivers on Greek bank collateral to be re--instated."
"Third, and by far most importantly, the Greek government's capacity to agree and deliver on the conditionality of the current program remains the key source of uncertainty under the current agreement. Greek press already reports meaningful disgruntlement from within the rank and file of the SYRIZA party on the current agreement, with any pushback likely to be led by Panagiotis Lafazanis, leader of the powerful "Left Platform" within SYRIZA and current head of the important Environment and Energy ministry. Most immediately, the government will have to navigate the fallout from today's agreement, as well as the "reform list" that will need to be submitted on Monday. To name but one example, the Greek Prime Minister earlier this week announced that he would imminently submit to parliament a labor market re--regulation bill, something that is unlikely to be approved by the institutions. On a more forward—looking basis, it is likely that the government will have to agree to fresh revenue generating measures: even with a downward adjustment to this year’s fiscal targets: budget execution for this year is meaningfully off—track."
"To summarize, Europe was finally able to achieve progress this evening. But the road ahead remains long, and it remains unclear how the current government can navigate between the commitments it has made to Europe with competing domestic political demands – both internally within the SYRIZA party as well as with t the electorate. A small step has materialized, but the hard work is about to begin."