Act 1 of the Greek tragedy came to an end this week with Greece obtaining an interim four-month financing agreement in exchange for a lengthy but somewhat vague list of reform commitments. After difficult negotiations the Eurozone finance ministers agreed on Tuesday to approve the list of reforms that Greece had pledged to implement.
Approval by various euro-area parliaments is also necessary. This approval now looks assured in the two most important ones: Germany and Greece. In Germany a test vote showed that a majority clearly supports approval. And in Greece, after a difficult twelve-hour debate in the Greek parliament, the government appears to have the necessary support for passage.
Waiting For The Cash
Greece has not yet obtained access to the new funds (€7.2 billion) specified in Tuesday’s agreement. Rather, the Greek government is now beginning act 2 of their drama. Greece must now obtain agreement, both internal and with its creditors, on a “final” list of reforms, including their specific content, and implement them before the end of April.
There will be intense technical discussions on these matters between Greece and its creditors. Of the three institutions that play an important role on the creditor side, two have signaled that they remain to be convinced about Greece’s reform pledges, while the third, the EU Commission, accepted Greece’s proposals without qualifications.
The IMF accepted the Greek list as a valid starting point. It also stated that “in quite a few areas, however, including perhaps the most important ones, the proposal is not conveying clear assurances that the Government intends to undertake the reforms envisaged in the Memorandum on Economic and Financial Policies (MEFP).” In a letter to the Eurogroup, the European Central Bank (ECB) President, Mario Draghi, similarly stated the ECB’s approval of the proposal as a “starting point.” He added “[W]e note that the commitments outlined by the authorities differ from the existing programme commitments in a number of areas. In such cases we will have to assess during the review whether measures which are not accepted by the authorities are replaced with measures of equal or better quality in terms of achieving the objectives of the programme.”
April's Next
The technical discussions with creditors will probably keep Greece off the first page during March. However, in April Greece will likely return to the headlines as act 2 moves toward a conclusion. There are sure to be very heated deliberations in Greece’s parliament as the government seeks passage of some difficult reforms. Confrontation is likely within the ruling party in several areas. Despite Syriza’s opposition to privatization, in its proposals to the euro group, the government has committed not to reverse the privatizations that have been completed and to respect the legal process with respect to tenders already launched. However, the energy minister, Panagiotis Lafazanis, appears likely to continue his opposition to the privatization of the electricity grid and part of the state power utility. Labor market reforms are another area where the government will surely encounter strong push-back from the hard-line “Left Platform” part of the ruling party. The Syriza government continues to have strong approval ratings but will likely find the next two months to be challenging.
In the meantime, European and global markets have shifted their attention to the approach of the March launch of the ECB’s program of quantitative easing via purchases of sovereign debt. Anticipation of this QE is resulting in record low interest rates across Europe. The yields on Germany’s 5- and 7-year debt have dropped into negative territory, and the Portuguese 10-year yields set a record below 2 percent on Thursday. Economic growth in Europe is strengthening, and investors are moving into European equity markets as well as buying bonds. Fears of a Greek exit from the euro and the shock that would result for financial markets clearly have receded for the time being. They may well return in April.
Bill Witherell, Chief Global Economist