May and June saw numerous “emergency summit” on the Greek topic. One more time, the talks were focused on unlocking €7.2bn in bailout funds under more austerity conditions. Following this last-chance summit, Greece has proposed to its creditors a 47-page proposal in which the Greek government declared that compromises have been made. Greece also added pressure by saying it would not fulfil next IMF payment case there were no deal by Friday the 5th of June.
However, cunningly Greece decided, under a specific rule, to gather several small payments in a larger one, and thus to delay its installments to the end of June. We do not think that unlocking funds again and again is a sustainable solution over the long run. It is worth adding that Greece must also pay almost €7bn to the ECB in July and August, major instalments being the 20th of July. In our opinion, a Greek default would not necessarily mean an exit from the Eurozone, but will alter considerably the ECB’s strategy to support Greek banks.
Greece’s officials seem to be gaining time as the current compromises are too demanding. The pressure on Greek pensions and on public domestic wages are now at a climax. Politically, Syriza has been elected under the promise of stopping austerity but agreed nonetheless in reforming pensions and the value added tax system. Greece is on its way out and the sooner the cheaper. ECB, to save its credibility is now disposed of compromising on the 4.5% budget surplus for 2015 and 2016. On its side, Greece reduces regularly what primary surplus it can offer for this year. Promises only bind those who believe in them. The lack of volatility in EUR and peripheral bond yields indicated the markets are anticipating a short-term patch to give policy makers more time to hope for economic miracles. Yet, even if a deal is struck for “more cash for less reforms”, due to the massive debt burden it’s only a matter of time before Greece is back asking for more economic support.