When we last blogged about Greece in late February, negotiations for a deal between Greece and its creditors were underway. A crisis was avoided when an extension to the existing deal was reached that would prevent an imminent Greek default. This deal acted as a ‘bridge’ until a more permanent agreement could be negotiated by the end of June when the Greek state would need to be refinanced to cope with maturing debt liabilities.
With the expiry date fast approaching, negotiations between Greece and its creditors have gathered pace. The picture that has emerged is all too familiar; statements of reassurance that the proposals between the two sides are converging followed by rejection of the proposals in front of national parliaments.
The impact of these contradictory signals is also familiar; bond, currency and equity markets are fluctuating wildly at every indication that negotiations are going one way or the other. Here in the UK, the FTSE 100 hit a 16 year high when the Eurogroup deal was reached in February. On Tuesday, when negotiations appeared to have taken a bad turn the stock market plunged to a three-month low.
Where are we now?
Negotiations are currently ongoing to reach a deal by the end of June. Last Friday, Greece joined Gambia as one of only two countries to have ever postponed an IMF repayment, exercising a rarely-used right to repay due instalments in one lump sum at the end of the month.
Yesterday, the IMF left the negotiating table abruptly citing lacklustre progress in Greece’s reform proposals. However, it left the door open to resume talks when Greek government officials are prepared to dig deeper with structural reforms. The overall sentiment is one of ‘converging divergence’; the two sides are closer to an agreement but still a considerable way apart.
The sticky points
The proposals for the Greek deal revolve around an agreement on primary fiscal surpluses, pension and VAT reforms. While it appears that despite differences, targets for fiscal surpluses can be bridged, the latter two reforms are trespassing on Syriza’s ‘red lines’.
These ‘red lines’ are Syriza’s election pledges, meaning that if the Greek government concedes these points it will have backtracked on key promises to its electorate. Noticeably absent is any – at least public - talk about the level of Greek debt, currently at around 180% of GDP. The IMF has warned that the level of Greek debt is unsustainable and relief should be granted by the Eurozone.
But this in turn tramps on Europe’s ‘red lines’. In any case it’s highly unlikely that any restructuring or relief would be considered before a reform package has been agreed on.
The next big milestone in the seemingly never-ending Greek saga is the Eurogroup meeting on Thursday. The relevant players will once more sit around the table and attempt to find a compromise that will ensure that Greece remains in the euro.
What’s at stake is finding a reform package that is both acceptable to the Eurozone national parliaments and economically sensible. The new deal for Greece will need to provide the levers for Greece’s debt to be repaid by a sustainably growing economy – not by the issuance of new debt. At the moment, both sides seem to be falling short of this objective.
Given the distance between the two sides it’s hard to envisage that a final deal will be reached by the end of this month. More likely is another extension to give the two sides more time to negotiate a long-term solution. Still, time is not on their side; and especially not for Greece. An extension of the current deal is another extension to the uncertainty that is afflicting global markets and pushing Greece to another year of recession.
What about British manufacturers?
We have talked about the impact of a possible ‘Grexit’ on British manufacturers (see our blog). Arguments by some Eurozone officials about the safeguards that Europe has put in place in case of a ‘Grexit’ appear to be unravelling fast. It is becoming increasingly apparent that both sides have too much to lose.
In the meantime, the protracted uncertainty around the Eurozone is not helping either. For British manufacturers the faster the deal is reached the better. A strong Eurozone is vital for British manufacturing; 8 out of 10 largest export destinations for British manufactured products are Eurozone countries.
What is more, the UK’s own battle with Europe is soon to begin if it has not already started. What will happen with Greece could have a significant bearing on the debate around the UK’s membership of the EU. A strong unified eurozone at the heart of the EU versus a disintegrating monetary union comprise two very different contexts for Britain’s upcoming negotiations with Europe.