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How Greece Could make it Until December With The Existing Bailout

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by , 06-08-2015 at 09:58 AM (1462 Views)
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If Greece wants to avoid defaulting on its debts, a deal has to be found within days. But back-of-the-envelope calculations by Real Time Brussels show that the Athens government and its creditors may have until the winter to seal a third bailout deal for the country.

Here is how:

Greece’s decision last week to bundle this month’s payments to the International Monetary Fund means its first major redemption, €1.6 billion, is on June 30. That’s why we expect a “staff-level agreement” on budget cuts and overhauls between Athens and the institutions overseeing its bailout by the June 18 Eurogroup at the latest. If both debtor and creditors want to avoid calling the German Bundestag back for an extra session, a deal could be preliminarily approved at a special Eurogroup this weekend.

Whether this week or next, that meeting of eurozone finance ministers will be key. They would have to approve the conditions attached to new aid, set out a schedule for loan payments linked Greece implementing “milestone” measures, and extend the currency union’s bailout package beyond its end-June expiration date. We believe an extension would last at least until September and possibly into December.

All this would give national parliaments—in Greece and in creditor countries like Germany—sufficient time to vote through the modified bailout deal and approve a first payout, likely all or part of the €1.9 billion in profits from European Central Bank’s investments in Greek government bonds, before June 30.

Crucially, such a disbursement would lead the ECB to allow Greek banks to buy more short-term debt from their own government. For our calculations, we assume the cap on treasury bills will be increased by €3.5 billion, just like in August 2012, when Greece faced a similar funding bottleneck.

The ECB profits and T-bills would give the government of Prime Minister Alexis Tsipras an extra €5.4 billion. Since Greek officials had been briefing until this week that they had enough cash to make at least the first two scheduled June payments to the IMF, we also assume that Greece still has around €600 million sitting in its treasury. That takes the total cash buffer to around €6 billion, easily enough to pay the €1.6 billion to the IMF this month, €450 million to the fund in July as well as €3.4 billion to the ECB that same month. We’re left with around €550 million at the end of July.

The next big redemption, €3.2 billion to the ECB, isn’t until Aug. 20 (more on Greece’s repayments here). That’s good, because a lot may have to happen in the meantime.

There’s a chance that Mr. Tsipras loses the backing of his coalition when he presents the agreed budget cuts and overhauls to Parliament and instead has to rely on opposition votes. That would either force the prime minister to build a new coalition or call elections, possibly as early as July 5. We assume that Mr. Tsipras would win these elections, emerging with a coalition of less-radical lawmakers willing to back his efforts to keep Greece in the eurozone.

With this out of the way, Athens and the creditors can move on to another hard task: agreeing on a third bailout program. Without more rescue loans—and some measures to reduce Greece’s debts—the IMF is unlikely to disburse its next slice of the bailout program. That’s at least €3.5 billion from the IMF and possibly more if the fund throws in some of the 2015 payouts (the current loan slice should have gone to Greece last year under the original bailout schedule). We also assume that the eurozone’s rescue fund, EFSF, won’t transfer its final €1.8 billion tranche without the IMF.

That means that at some point before Aug. 20, the eurozone has to tell the IMF that a third bailout is coming. Some officials believe that the IMF won’t pay until a new rescue program has been formally approved, but others think a firm promise, in writing, will suffice, as it has in the past.

With the €3.5 billion from the IMF and the €1.8 billion from the EFSF, and taking into account the €180 million August interest payment, Greece is now back up to around €6.7 billion. After making the €3.2 billion transfer to the ECB, the government moves into September with €3.5 billion – enough to pay €1.53 billion to the IMF in September and €450 million in October. There’s also around €150 million interest due to the IMF on Nov. 1.

Things get tricky again in December, when Greece has to send a total of €1.2 billion to the IMF. By then Greece and the eurozone should have agreed on a new loan package. But if not, there’s some extra cash– more than €1 billion in in ECB profits due for transfer to Athens in 2015–that could tide them over for a bit.

There are many caveats to this scenario and other ways to make the numbers work*. Most importantly, Greece first needs to agree to implement unwanted spending reductions and reforms—something it was rejected as recently as this weekend. The scenario also assumes that the government can balance its own expenses beyond its debt and interest payments. Finally, Athens has built up payment arrears to its own citizens, including payments to government contractors and tax returns. Those stood at €4.8 billion in April and failing to pay off at least some of these arrears may hurt its economy even more.

*One option that has been discussed is giving Athens access to some €10.9 billion in EFSF funds that had been put aside for bank recapitalizations.


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