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Third Time's The Charm? Greece Agrees To Bailout Amid Rampant Skepticism

After what were described as "marathon" negotiations (although compared to the "mental waterboarding" he suffered in Brussels last month, this must have seemed like a walk in the park to PM Alexis Tsipras), Greece and its creditors have agreed to the terms of the country’s third bailout program. Here are the details, via Bloomberg:

  • Greece’s deal with creditors provides funding of ~EU85b over next 3 years ensuring ability to meet payment of debt obligations, Athens-based Press Ministry says in e-mailed statement.
  • Deal sees 2015 primary deficit of 0.25% of GDP, primary surpluses of 0.5% in 2016, 1.75% in 2017, 3.5% in 2018
  • Govt will take initiatives in coming months to settle issue of bad loans that stand at ~EU95b, consultation group on issue to be set up with creditors, govt won’t allow sale of bad loans
  • Greek power grid operator Admie to remain public asset, there will be no break up of Public Power Corp, natural gas market to be liberalized

Over the weekend, FAZ reported that creditors had drafted an MOU which would need to be discussed with the Greek finance ministry before it could be passed to EU member countries and the Greek parliament for final approval. Generally speaking, today was the deadline to produce a mutually "acceptable" draft agreement, as Athens must make a €3.2 billion bond payment to the ECB next week in order to ensure that the Greek banking sector retains access to ELA. Now, it looks like Europe will get to pay itself back after all, assuming there are no unexpected political problems later on in the week. Here’s Reuters:

Greece and its international lenders clinched a multi-billion-euro bailout agreement on Tuesday after marathon talks through the night, officials said, raising hopes aid can be disbursed in time for a major debt repayment due next week.

 

After a 23-hour session that began Monday morning, exhausted Greek officials emerged in a central Athens hotel to announce the two sides had agreed on terms of the three-year agreement barring a couple of minor issues being ironed out.

 

"Finally, we have white smoke," a finance ministry official said. "An agreement has been reached."

 

Finance Minister Euclid Tsakalotos confirmed only "two or three small issues" were pending. Greek shares rose, with the banking index surging 6 percent, while two-year bond yields fell more than 4 percentage points.

 

Greek officials have said they expect the accord to be ratified by parliament on Wednesday or Thursday and then vetted by euro zone finance ministers on Friday. This would pave the way for aid disbursements by Aug. 20, when a 3.2 billion euro debt payment is due to the European Central Bank.

Although it certainly appears as though this is a done deal, the usual caveats apply, including the fact that Tsipras will be forced to once again beat back party infighting to pass the draft through the Greek parliament with the presumed backed of opposition lawmakers. As noted on Sunday, the Syriza rebellion which imperiled the first two votes on bailout prior actions will likely have died down in the wake of a dramatic party meeting late last month in which the Greek Premier insisted that for the time being, "opposing voices must stop."

Once the bailout is official, Tsipras will convene an emergency Syriza party congress (likely in the first two weeks of September) - the meeting could be a prelude to snap elections.

Germany meanwhile, has pressed all sides to take their time and to avoid letting the ECB payment dictate the pace of negotiations. Whether or not Angela Merkel and German Finance Minister Wolfgang Schaueble will be satisfied that the proper diligence was exercised over the past two weeks or so remains to be seen. "One needs to look closely and then we’ll ask the Bundestag for approval when the common understanding is that this will hold for three years," Schaeuble’s deputy Jens Spahn told ARD television on Tuesday. "It has to be convincing that it isn’t just about Aug. 20 and an installment payment, but really about how, together with the Greeks, we can have a lasting solution for Greece. Most of our colleagues agreed on July 17 that we wanted to speak to Greece and would give it another go in negotiations, and now we need a good result for them to be able to say that the result, the negotiations result is right. Privatization isn’t just about raising money, it’s about changing parts of the economy. Think about what the privatization of our federal post and federal railways meant for those industries in terms of competition and new opportunities"

The most immediate concern after the ECB payment will be "stabilizing" Greece’s woefully undercapitalized banks. Here’s more from Reuters:

During talks that dragged through Monday night, the sides reached agreement on the three main sticking points - dealing with non-performing loans held by banks, setting up an asset sales fund, and deregulation of the natural gas market.

 

Athens wanted to set up a "bad bank" to take on the problem loans, while creditors want them bundled and sold to distressed debt funds. It was not immediately clear how that was resolved.

 

Officials had also argued over how to set up a sovereign wealth fund in Greece designed to raise 50 billion euros from privatizations, three-quarters of which would be used to recapitalize banks and to reduce the debt.

€10 billion will reportedly be funneled to the banks "immediately," but as Citi notes, real risks remain including the fact that, as we've noted on dozens of occasions, NPLs will rise materially going forward as the economic situation continues to deteriorate.

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From Citi

Greek Banks

A new Greek bank Asset Quality Review is being conducted by the ECB with credit file data being submitted in the coming days and the new Stress Test template. The ECB stress test of Greek banks is expected to complete by end of Oct and recapitalisation process is scheduled to be completed by Dec. Greek bank NPLs have clearly risen this year and the outlook for recovery delayed due to the political and sovereign challenges of the past 9 months or so. The example of Cyprus suggests that payment culture could worsen dramatically post capital controls: BoC’s NPL increased from sub 30% in 2012 to over 50%.  

Recapitalisation — Based on our scenario analysis, Greek banks’ capital needs ranges between €6-22bn, assuming an NPL ratio of 45-55% and coverage ratio of 60% and current €12.5bn DTC is included in capital. There could be 70-90% dilution to existing shareholders, with no bail-in.

Greek bank stocks are down c85% from the levels prior to the recaps in 2014 and down c60% from the last Greek General Election. Greek bank shares have halved since the market re-opened post capital controls being imposed. The next key stage for the Greek banks: another ECB Stress Test, likely to be completed by October 2015, and bank re-capitalisation likely to be completed by December 2015.

A case study of Bank of Cyprus suggests that the already impaired Greek payment culture could worsen dramatically post the recent imposition. Bank of Cyprus’s NPL ratio exceeded 50% from below 30% in 2012. One difference in Greece versus Cyprus may be a lack of depositor bail-in. 

Greek banks’ capital need may range between €10-22bn assuming a peak NPL ratio of 45-55%. On this re-cap scenario, Greek banks in aggregate would trade on an adjusted P/TB of 0.6x to 1.2x including DTCs and 1.3x-3.0x excluding DTC.

 

*  *  *

Of course all of this assumes that the deal is viable in the first place which, as the IMF and the EU Commission have made clear, simply isn't the case without some manner of debt relief or re-profiling for Athens, and even then, creditors seem profoundly unwilling to admit or even consider the fact that forcing the Greeks into a deep fiscal retrenchment in the midst of what amounts to a depression may be counterproductive to the point of absurdity. From ABN Amro (via Bloomberg):

Several potential pitfalls could knock Greece’s deal with its creditors off course in coming months, raising Grexit worries, ABN Amro analysts Aline Schuiling and Nick Kounis write in client note.

 

These include the weak economy, which makes for a very tough environment when implementing difficult measures, risk that austerity proves counter-productive, the need for debt relief and risk of a financing gap

 

Given Greece, Germany and the IMF have all expressed doubts about the program, it’s not clear how things will play out should the going get tough

And here's BBC:

There will be few economists who believe that Greece will succeed in generating a surplus of 3.5% in 2018 and then sustaining that surplus for years - partly because it is rare for any Western economy to stay on a path of spending less than tax revenues for any length of time, let alone an economy with a private sector as feeble as Greece's.

 

And I am sorry to say you will have heard this a few times from me, the really hard negotiations start soon - on how to reduce Greece's massive debts, set to peak at close to 200% of GDP or national income in the next two years (according to the IMF) to an affordable level.

 


 

Without debt write-offs, prosperity will never return to Greece, and its future in the euro will never be assured.

 

With debt write-offs, populist parties throughout the eurozone will be able to claim to voters that they have nothing to fear and everything to gain from throwing out the mainstream establishment parties and re-asserting national sovereign rights to economic self-determination.

 

Or to put it another way, euro politics and euro economics of Greek debt forgiveness point in diametrically opposed directions.

 

Which is why no-one should see today's important bailout agreement for Greece as a permanent happy ending.

So if you're Pablo Iglesias you're watching closely to see if Germany blinks in its staring contest with the IMF over writedowns for Greece - if they do, the door is open to demanding similar relief for Spain, which could prove to be a powerful campaign message going into elections due before the end of the year. 

As for Greece, even with writedowns, the outlook is grim. As Finnish Foreign Minister Timo Soini said over the weekend, "we should just admit that this isn't going to work."