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Threat of Grexit still looms, Greeces return to markets still far away

Eleftheria Kourtali

The Greek bailout review will be completed by the end of the month, but there will not be an agreement on the debt, says arclays’ economist Francois Cabau, in an exclusive interview with He does not rule out the threat of Grexit returning, he gives warning on Greek banks’ NPLs, while he views that it is too early to say when Greece can return to the markets. Mr Cabau thinks that the contingency measures are an extremely important mechanism and views that the debt relief is a huge political gain for Alexis Tsipras.


Mr Cabau, after the extraordinary Eurogroup of May the 9th, and a few days after before the Eurogroup of the 24th of May, are things looking brighter for Greece?


It’s always difficult to look through a Eurogroup meeting because it tends to be biased to the optimistic side, but to me it sounded like that they did make some progress on the Greek issue.


I think we are close to an agreement. They eventually have a deal on the contingency measures and therefore there could be an agreement on the program review by the end of the month – not necessarily on the 24th – but not on the debt. I think the debt talks are set to be more complicated.


It is important that debt relief was discussed and that the IMF reportedly welcomed Eurogroup’s three layer approach, to identify measures that could improve debt dynamics in the short, medium (by the end of the third program), and in the long term.  This opens the way to set the basis of the debt relief at the next meeting on the 24th, and there was also commitment by all sides to complete the bailout review by then.


However, it is clear that debt relief measures will only be implemented upon full implementation of the third bailout conditionality.


The deal is possible because the Greek government passed through Parliament the hardest reforms which are the pension and the tax reforms. There are still open issues such as the additional legislation on the selling of non-performing loans and adopting the agreed Greek Privatisation and Investment fund, but the important thing is that the most contentious reforms from the domestic political perspective are out of the way and there seems to be a high level agreement on the contingency measures and how these would work.


Is the prospect of “Grexit” returning ruled out or could we be faced with a 2015 déjà vu?


The possibility of Grexit remains – it never went away actually. Greece went so much in the background after last August’s agreement, and it is worth reminding people that a lot of issues remain and a lot still needs to be passed through parliament, plus there is a very weak government majority.


Furthermore, if you look at the developments of the last few weeks it looks increasingly like the situation of last year because Greek PM Alexis Tsipras wanted to make the Greek issue more political than it is technical.


This keeps reminding us that Greece is not off the radar completely and it shouldn’t be dismissed from a European market perspective. The integrity of the euro, from a political perspective, is very much at stake and we are not done with the existential problem of the euro and how Greece plays a role in it. The situation could derail for many reasons, and a first step could be to call for a political agreement, instead of ironing out the technical details.


We could be plunging back into more turmoil and uncertainty from both a Greece’s perspective and from a European perspective, because if you look at the overall European situation, it is quite tense: we have the migration crisis, Brexit, Spain elections, Turkey. So, it’s not only about Greece making noise.


IMF’s role in the Greek program is not clear, what do you think the Fund will do in the short term?


Yes, certainly there is lack of clarity and it’s sort of a snake eating its own tale. For the Europeans to disburse any tranches they need the IMF in, but the IMF needs the debt talks to be completed, but this is very difficult for the Europeans, but then the Europeans don’t want to do anything before the IMF is in and so on and so forth.


So it’s very much like a circular situation which is complicated. But on the bright side Europe laid out this 3-layer (short/medium/long term) type of strategy for the debt to which the IMF agrees. It’s quite clear there will not be a full-fledged short, medium term and long term debt relief without the creditors being sure about the full implementation of the conditioning to the program. It is also clear that there is no case in May or in June there will be a fully pledged relief on the debt.


In my view, the IMF would stay in especially in the short term because a lot of Parliaments (Dutch, Finnish, German) will not disburse any money if the IMF is not in.

The fact is that in order to progress you have to have a short term agreement, otherwise things will get stuck. So, the IMF will possibly write a consent letter saying that the first review is done, things are progressing and there is ownership in the program.

That is the way forward. It’s going to be very much conditional on a step by step basis. This will open the way for the ECB to purchase Greek government bonds and that, from a market’s perspective, is going to be huge.


The review is needed to get back the waiver as ECB has said in the past,  but I think they also need to have a reassurance on the side of the debt to buy again GGBs.


Do you think that Greek banks will need another recapitalization and will we see consolidations in the Greek banking sector?


This is a big question mark because it depends on the legislation on the NPLs, how much will the discounts be, and how much of these bad loans were valued at the time of the last bank assessment exercise.


The NPL ratio, especially for some banks is roughly 50% and the question is how much it was accounted for at the time of the bank recapitalization back in November. Because depending on the price at which the NPLs are sold to the funds versus how much they were valued at the time of the assessment exercise, is very important for the four Greek systemic banks’ ”next day”.


We cannot rule out seeing banks mergers given how much money was injected to the banks since 2012 and if you have a bad bank created fully maybe four systemic banks cannot be maintained in the Greek system. Some of the four banks are in a particularly difficult situation from an NPL and a capital perspective, compared to others.


The most important thing for Greece is to see a rebound in it its GDP growth but the catalyst relies a lot on the politics and on the implementation of the program. A lot of time will be needed to get confidence and investments back in and there is also aneed for significant inflow of credit. So, in the meantime it doesn’t make sense to have four systemic banks in Greece.


About the contingency measures, is it possible that they won’t be needed to be implemented, as Alexis Tsipras has stated?


The existence of a system that will automatically impose compliance with the financial objectives will help to strengthen the credibility of Greece and the removal of uncertainty will be crucial for attracting investment.


The target for this year’s surplus is 0.5% and one of the key elements is how much growth there will be in 2016. The fact is that there will be a debt relief even in the short term, coupled with an agreement on the first review. Even though the government coalition remains thin in the Parliament, there is definitely potential to get growth back on and therefore, if that’s the case, it’s quite possible that the contingency measures will not be needed for 2016, although it will be known in April next year.


But next year’s surplus target is 1.75% so that’s much harder. On the bright side, if there is a miss it will only be known in two years time, in April 2018, so that could give the government some leeway.


This mechanism is not a monthly thing and most importantly it is an insurance policy to see things being implemented. It makes economic sense. In case these measures need to be implemented you have a head of 3-4 months (May to September) but then these can be re-calibrated into more longer term structural issues  into the year’s budget. The logic behind it is quite good.


Will Greece need another bailout? When will it be able to access the markets?


We need to recall ourselves that back in 2014 the whole political situation got off track and it would be unfeasible that Greece could survive without a program by now. It was growing, it had investment, big normalization in the interest rates but the fact that it got excluded from the ECB afterwards, it caused a spike in yields.


There is so much work and improvement needed but in the meantime you can see that Greece had a 25% of GDP contraction and there will be a rebound from that, and a rebound in investment because things are cheap . As long as Europe stays in and Greece has Schengen and the euro, there is a lot of benefit to be gained from that. Saying that beyond 2018 Greece will need a new program, it is too soon.


Greece needs also this ongoing effort of restoring confidence into international investors and creditors. It has to make sure that people also see the prospects are improving and that there is a willingness to grow out of this crisis. In order to see if a 4th bailout is needed we need to see how much has Greece grown in the next 2 years . And primary surplus is quite critical. Having 3.5% sustained primary surplus is a killer. So that will have to be reviewed, in my view.


A far as Greece’s borrowing costs are concerned, It doesn’t look like the ECB is going away anytime soon and it -if anything- will have to more. We’ll have QE for three years at least . So from a funding cost perspective, whether Greece can access markets, I think there is leeway but it looks far away from here. Of course it depends also on the government still implementing the reforms and remains on track. I think it can be done. It depends of course and on how the world looks at that time, whether China proves to be disruptive for Europe etc., so it is not only depended on Greece.


We’ve been so astonished and shocked by last year and we have the tendency to look at things in a dire way. But unlike 2015, Alexis Tsipras seems a lot more constructive than when Varoufakis was his Finance Minister. He now shows more willingness and he wants to implement the program. Although he has a shallow majority, the fact that he gained debt relief is a huge political gain. He’s been arguing that point since day one. Politically speaking this will be massive.


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