Greece Update – Again no decision, but options are clear

From Deutsche Bank

Today’s second Eurogroup meeting on Greece was cut short, again concluding in deadlock. The atmosphere remains tense, but through all the multiple and conflicting headlines, the subsequent Eurogroup press conference provides us with a clear framework on how the Greek crisis will progress over the next few days and weeks.

First, Eurogroup chair Dijsselbloem has formally confirmed that Europe’s preferred path forward is a Greek request to legally extend the current program that expires on February 28th. Such a request needs to materialize by the end of the week, to give time to six national parliaments (inclusive of the Netherlands, Germany and Finland) to pass this extension through into legislation. Failing this deadline Dijsselbloem confirmed that the only option that would then be left to Greece would be a request for a fresh 3rd ESM program. All in all, the starting point therefore remains the same as the one we had outlined a few weeks ago: semantics aside, Greece can choose to either extend the program or apply for a new one.

Second, it is now also clear that either program extension, or a potential new program will require specific conditions. Eurogroup head Dijsselbloem specified three conditions, which are also apparent in the leaked Eurogroup draft statement that was rejected by the Greek side: a commitment to fulfill financial obligations (ie. repay debt), a commitment to not take unilateral actions (ie. to not reverse prior program policy) while negotiations are under way, and a commitment to conclude the program, or – implicitly in the case of a new program – to maintain the broad principles of current policies. In return, Greece will be granted “flexibility”, potentially around both the fiscal path and the mix of structural reforms being implemented.

Third, the binding dates for Greece have now also become apparent. Program conclusion on February 28th is not the point of “no return”, but instead the soonest of when Greek banks are no longer able to access additional ELA at the ECB window OR when the Greek government runs out of financing. The latter would make the government incapable of meeting ongoing commitments to the IMF and other obligations, in turn rendering GGB-based collateral inadmissible to the ECBs ELA that would then be suspended.

From this perspective, the next point of focus is not only the Greek government’s position over the next few days but also Wednesday’s ECB meeting, where Greek bank ELA usage is under bi-weekly review. A more explicit statement around when and how ELA usage would be capped by the ECB would be an additional means of raising the pressure on the Greek government.

Ultimately, then, we are still left with the same three-step process to reach a conclusion to the Greek crisis.

• Step 1 consists of a request for a new program or an application for a 3rd ESM program with Greece committing to some a prior conditionality.
• Step 2 consists of negotiating the substance around this conditionality, in particular the prior actions that would need to be fulfilled to disburse funding to Greece.
• Step 3 would consist of passing such prior actions through the Greek parliament and ultimately servicing Greece’s loan obligations.

The more each of these steps is delayed, the shorter the timespans available and the greater the risks of failure.