1. Greece: Last chance saloon
It has been two arduous months since the Syriza party won the Greek elections on a platform to
renegotiate the country’s debt and terminate austerity measures imposed by the IMF/ECB/European
Commission Troika. The negotiations between Greek Finance Minister Varoufakis and his eurozone
counterparts have generated much noise but seemingly achieved little.
A more constructive view is that the range of likely outcomes, which I highlighted in Fifty Shades of Greece,
has narrowed – and markets tend to favour certainty to unpredictability. Prime Minister Tsipras’ government
has so far proven wrong the pessimists predicting the country’s imminent exit from the eurozone. The
eurozone’s main protagonists understand, in private at least, that a Greek default and/or exit from the
eurozone would seriously dent the European project at a time when Russia is trying to expand its influence
westward. It would also likely mean large losses for eurozone creditors, including the European Central
Bank (ECB), and national governments and banks.
There have also been modest compromises. The ECB agreed to raise the amount Greek banks can borrow
from their central bank under the Emergency Liquidity Assistance program to € 71.1bn. Eurozone policy-
makers have seemingly, albeit begrudgingly, accepted the government’s less ambitious primary fiscal
surplus target of 1.5% of GDP for 2015 – half the original Troika-mandated target and only a marginal
improvement on the estimated surplus of 0.3% of GDP in 2014.
At the same time, the Troika has held firm that there would be no debt restructuring, let alone forgiveness,
or significant scaling back of the reform effort. If anything, eurozone leaders are more united in their view
that Greece can and should repay the principal and interest it owes to both private and official creditors.
French President Hollande initially entertained the idea of a Greece debt restructuring but now appears to
have fallen in line with Germany’s uncompromising stance. The Spanish and Portuguese prime ministers,
watchful of their own electoral positions should Greece succeed and emboldened by the ECB’s QE
program, are clear that Greece should not benefit from further concessions lest it creates a dangerous and
unfair precedent.
So for all its populist posturing, Syriza is facing up to the harsh reality that eurozone creditors are not for
turning and that importantly time is running out.
The government is already scraping the bottom of the financial barrel. It has been forced to transfer cash
reserves of state institutions to the central government common fund to help pay for end-month wages and
pensions estimated at €1.7bn.
The government also faces principal debt repayments of about €3bn in April. These include a €460mn
payment to the IMF on 9th
April (out of about € 31bn outstanding to the IMF) and €1.4bn and €1.0bn
maturities on 6-month T-bills on 14th
and 17th
April, respectively. These payments will overstretch the
government’s finances, assuming that a default on debt owed to the IMF – a lender of last resort with
preferred creditor status – is almost inconceivable.

2. The Troika has closed off to the Greek government a number of avenues of financing (see Figure 1). The
ECB recently made legally binding the cap on Greek banks’ holding of T-bills, thus limiting the amount of
short-term debt the government can issue to finance itself. Eurozone finance ministers also concluded that
the unused €1.2bn of cash from the Greek Bank Recapitalisation Fund was correctly returned to the EFSF
bailout fund, dashing the Greek government’s hope of getting these monies any time soon.
Figure 1: Greece is running out of options…and time
Source: Hellenic Republic Debt Bulletin, IMF
So the government is now increasingly reliant on the €7.2bn of outstanding bailout funds, which the
eurozone has made conditional on Greece sticking to its reform and austerity drive. As a result, the
government is gradually scaling back its pre-electoral promises. It has accepted a four month extension to
the current lending program. It has just put the finishing touches to a package of measures to raise €3bn,
which on top of a crackdown on tax evasion, higher taxes for top earners and a VAT overhaul, includes i)
re-launching its privatisation program (although it will maintain managerial control of key state assets), ii)
introducing levies on alcohol and cigarettes and iii) pushing ahead with labour market reforms.

3. It’s not in the bag yet, though. The Troika has suggested that bailout inspectors first need to green light the
government’s package and it would then require hard evidence that the program is being implemented. So
coming weeks will be critical.
Figure 2: 10-year government bond yields have continued to fall…but not in Greece
Source: Investing.com, www.olivierdesbarres.co.uk
The government faces debt payments in May of a similar magnitude (€3.6bn) and a cumulative hump in
June-July of about €12.7bn, but the ECB may by then be in a position to buy Greek bonds via its
Quantitative Easing (QE) program. This would help the government get renewed access to capital markets
at non-prohibitive rates (see Figure 2). Repayments of T-bills, bonds and loans also become far more
manageable in 2016, with maturities of about €6bn – a fraction of this year’s €39bn according to the
Finance Ministry.
The ECB’s QE and signs of improving eurozone growth, including a jump in the PMI composite output to a
near four-year high in March, have so far acted as a circuit-breaker to contagion from Greece to broader
European markets. Eurozone equities are up year-to-date (even in $-terms), peripheral yields are down
(see Figure 2) and the Euro has rebounded since mid-March. Finding a lasting solution to Greece’s
economy remains, for now, an important missing part of the eurozone puzzle.
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GDP-weighted average of Ireland, Italy, Portugal and Spain, %
Greece, %
10-year government bond yields (%)