Greek Bond Drama Meets Realpolitik
Monday’s meeting of European finance ministers looks like the last chance for some form of agreement on the next leg of Greece's 86 billion euro ($91.4 billion) bailout, before Dutch and French election complicate negotiations. Anything can still go wrong with seemingly unsolvable differences between the European authorities, the International Monetary Fund, and the Greeks.
The worries are certainly reflected in the sharp selloff of Greece's 2 billion euro bond maturing July 2017. As befits a serious credit event, Greece's yield curve has inverted, where soon-to-mature debt yields rise above those for longer-dated bonds, reflecting the view that if Greece can make it past the next couple of years it is more likely to make it in the longer term.
Gauging sentiment by looking at the Greek bond market isn't straightforward as volumes are low, with just 26 million euros trading during January on the inter-dealer platform. Even so, this loss of faith is overblown.
European economies, including Greece’s, are in better shape since the highly-fraught 2015 bailout pushed the currency union to the brink and Greek yields substantially higher than they are now.
But the real issue is that, politically, there is every reason to suggest agreement on the bailout terms, which is needed to release more aid to meet about 8 billion euros of debt repayments by July. It's hard to see who wins if the parties walk away. The risk in letting it all go now after all the hard yards is far higher than the embarrassment of extending and pretending one more time.
Eurogroup Chairman Jeroen Dijsselbloem said Feb. 10 he didn't feel a "crisis atmosphere." If a deal isn't cobbled together, then work will continue in the coming weeks, he said.
The creditors' normal veneer of agreement was fractured in January when the IMF released its searing assessment of Greece's "unsustainable" debt. But its insistence on austerity looks itself unsustainable in the face of the Syriza government's pledge for "not a single euro more."
More to the point, press reports that it may contribute up to 5 billion euros to a rescue, and that Managing Director Christine Lagarde will meet Chancellor Angela Merkel on Wednesday, pave the way for the Germans to get on board. Merkel would do well to put the issue to rest now, lest it become a flashpoint at September's elections -- her political opponent, Martin Schultz, has been arguing for Greek debt relief for years.
The real pull for the IMF will be avoiding writing off the billions they've already contributed. Lagarde's also facing some time pressures -- President Donald Trump has yet to opine on the situation, and the IMF will want to control the resolution.
Furthermore, this is a knife fight between government institutions to execute a plan that's already been agreed -- the complexities around private sector involvement have already been resolved. And with Syrzia trailing in the polls the government won't likely seek negotiating leverage by calling an election, as happened in 2015.
Greece faces a few maturities in the coming months, but the heavy lifting is in July, when 6.2 billion euros of debt matures. That's still small beer compared with the 300 or so billion euros outstanding. If there's to be any chance of long-term redemption, Greece has to be able to fund itself again in the capital markets, something all parties surely want. The bailout has to remain on track until the country can issue on its own two feet.
The prospects for agreement don't imply that Greece has any chance of being included anytime soon in the European Central Bank's quantitative easing program -- that's a very distant dream, as I have argued. But July’s inflection point is still some way to go and the European Union has survived tougher tests. Expect political reality to overcome the fear of pouring yet more good money after bad.
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