After Six months of Eyeball to Eyeball, Greece blinked

Dear PGM Capital Blog readers,

After six months of chaos, and Eyeball to Eyeball negotiation between Greece and its Creditors, it looks like Greece has blinked in a showdown with European leaders over its financial crash.

Before analyzing the events of last week, after the July 5th, referendum, where 61% of the Greeks voted “NO” or “OXI” to more austerity measures, lets take a look on why Greece has so much debt.

EUROZONE GIVES GREECE DEADLINE OF JULY 12:
Eurozone leaders held an emergency summit in Brussels on Tuesday, July 7, to discuss the fallout from Greek voters’ defiant “No” to further austerity measures, with the country’s Prime Minister Alexis Tsipras set to unveil new proposals for talks.

Tsipras, arrived at the meeting buoyed by a triumph in last Sunday’s referendum, where an overwhelming majority of Greeks backed his call to reject the belt-tightening reforms that creditors had last proposed.

But that domestic victory did not appear to give him much leverage in talks with foreign creditors, who know Tsipras needs a deal soon to keep his country afloat.

 

After  day’s worth of talks aimed at finding a way out of months of bitter deadlock, European leaders were scathing in their assessments of Greece’s proposals, calling them inadequate and demanding the Greek government return with a detailed plan by Thursday, July 9.

Euro zone members have given Greece until Friday, July 10, to come up with a proposal for sweeping reforms in return for loans that will keep the country from crashing out of Europe’s currency bloc and into economic ruin.

The situation in Greece worsened with banks closed for a second week, limited cash withdrawals and businesses feeling the crunch of demands from vendors for cash payments.

Mr. Tsipras sounded upbeat as he left the summit, even though many of the reforms demanded by his partners would inflict more pain on Greeks who voted at his behest to reject the austerity measures in return for financial aid.

GREECE PM PRESENTS REFORM PLAN ON FRIDAY, JULY 10:
Greek Prime Minister Alexis Tsipras appealed to his party’s lawmakers on Friday to back a tough reform package after abruptly offering last-minute concessions to try to save the country from financial meltdown.

With creditor institutions due to deliver an initial verdict on Athens’ loan request and reform proposals within hours, euro zone partners appeared to be preparing for a deal at the weekend to keep Greece in the euro zone, Greece has put forward a plan of reforms, spending cuts and tax rises that is close to what was demanded by its creditors before Alexis Tsipras called last Sunday’s referendum.

The plan includes:

• Sweeping changes to VAT to raise a full 1 percent of GDP, moving more items to the 23% top rate of tax, including restaurants – a key battleground before.
• Dropping its opposition to abolishing the lower VAT rate on its islands, starting with the most popular tourist attractions, despite firm opposition from Tsipras’s coalition partner.
• Significant concessions on pensions, agreeing to phase out solidarity payments for the poorest pensioners by December 2019, a year earlier than planned, and raise the retirement age to 67 by 2022.
• Raising corporation tax to 28%, as the IMF wanted, not 29% as previously targeted.
• Cutting military spending by €100m in 2015 and by €200m in 2016.
• Implementing changes to reform and improve tax collection and fight tax evasion.
• Privatization of state assets including regional airports and ports.

See below video from The Telegraph for more details:

Not everyone in Greece is overjoyed about the new proposals, of course, especially given that Sunday’s July 5, referendum – was it really less than a week ago – had rejected something very similar.

Below picture shows protesters in front of the Greek parliament as it voted on the PM Tsipras proposal.

Early on Saturday July 11, Greek members of  parliament voted overwhelmingly in favour of the measures proposed by PM Alexis Tsipras – despite the fact that many of the ideas had been rejected by the Greek people in last Sunday’s referendum.

Some members of Mr. Tsipras’s own Syriza party voted against the proposals in anger at his apparent U-turn.

During a meeting on Saturday Eurogroup finance ministers, Greece’s creditors are drafting a response to Athen’s bailout proposal – outlining what extra measures are needed.

PGM CAPITAL COMMENTS:
In true dramatic fashion, the Greek government submitted an 11^th-hour proposal late on Friday, July 12, that meets most creditor demands, in exchange for a new 53.5 billion euro bailout – Greece’s third since 2011 – .

On Saturday, July 11, Greece’s finance minister, Euclid Tsakalotos, was locked in talks in Brussels with skeptical creditors, trying to persuade them that the Greek government can be trusted to deliver on its reform promises in exchange for a financial rescue securing the country’s future in the Euro.

A Question of Trust:
With Greece running out of money, and facing a July 20 demand for a three billion euro payment to the European Central Bank, a series of meetings the weekend of July 11-12, could hold the key to the country’s economic future.

Speaking at a meeting – on Saturday July 11 – to consider Athens’ request for a third bailout Eurogroup chief Jeroen Dijsselbloem, who is also Dutch finance minister said:

“A deal was still a long way off.”

“There is, of course, a major issue of trust: can the Greek government actually be trusted to do what they are promising to actually implement in the coming weeks, months and years?”

The magnitude of Greece’s private and public sector debts are crushing its economy and without meaningful debt reduction, default seems inevitable.

That’s why it’s likely the Grexit scenario will play out all over again at some point. So what can we expect when that day comes? The events of the past few weeks offer a glimpse into the future.

Based on this, we believe, that pretending Greece will be able to pay them off someday isn’t a viable solution.

On some future Friday, bank deposits will be denominated in euro, and presto, converted to drachma the following

Monday. This has all happened before in Argentina, Mexico and Peru in the 1980s, and as recently as 2002 for Argentina.

In all cases, the currency conversion was accompanied by massive capital flight from these countries, as citizens correctly anticipated a forced currency conversion and loss of purchasing power.

Conclusion of Eurotop on Greece of July 12, 2015:
Euro zone leaders told near-bankrupt Greece at an emergency summit on Sunday that it must enact key reforms this week to restore trust before they will open talks on any new financial rescue to keep it in the European currency area.

Prime Minister Alexis Tsipras will be required to push legislation through parliament to convince his 18 partners in the euro zone to release immediate funds to avert a state bankruptcy and start negotiations on a third bailout program.

Six sweeping measures including tax and pension reforms will have to be enacted by Wednesday night, July 15, and the entire package endorsed by parliament before talks can start, a draft decision sent by Eurogroup finance ministers to the leaders showed.

Greece Prime Minister, Alexis Tsipras was told that Greece will either become an effective “ward” of the eurozone, by agreeing to immediately implement swift reforms this week. Or, it leaves the euro area and watches its banks collapse.

Last but not least we want to end this blog article with the word from Germany’s finance minister, Wolfgang Schaeuble, as a comment on the results of Greece referendum of last Sunday, July 5th:

“Elections change nothing. There are rules.”

And looking at the reform package, proposed by Greece Prime Minister Alexis Tsipras, to its creditors on Friday July 10, which the Greece parliament approved Saturday morning, Mr.Wolfgang Schaeuble wasn’t wrong.

When the Going Gets Tough, the Tough Get Going.

Until next week.

Yours sincerely,

Eric Panneflek