Well, let's enjoy the European summer, where politicians, exhausted from too many euro crisis summits are embarking on their month long holiday, because when that is over, some monumental choices have to be made.
Greece is, unlike fellow bailout countries Portugal and Ireland, hopelessly behind the program it has to implement to satisfy the Troika (the IMF, the ECB and the EU). In a way, it is a reflection of the different nature of the problems facing Greece. Not only is its economy in deeper trouble than the other two, but in essence, the nature of the problem in Greece is political.
The state is still rather dysfunctional, with institutions like tax collecting mired in trouble. After the celebrations after the Greek elections (Syriza, the anti-bailout party wasn't going to form the next Government, as feared) died down, the rather sobering conclusion emerged that the two parties most responsible for the dysfunctional nature of the state apparatus were going to form the next government.
Can we really expect these parties, which have for so long treated the state apparatus as a fiefdom to deal out favors, to radically change their ways and risk their own annihilation? We're not at all sure about that, and we fear that certain calculations might very well make those decisions even harder.
Everybody realizes that it would be much cheaper for the rest of the eurozone to keep Greece within the euro, and armed with this knowledge, it's tempting for the Greek politicians not to make too serious a job of the measures they have to implement, especially where they hurt their own constituencies most.
Certain aspects of the program are clearly unattainable anyway, like the 50 billion euro privatization program. Who will pay top euro today for stuff that might be worth less than half in new drachma tomorrow? And the economy is worsening more than expected until recently.
This year, the economy is expected to shrink by another whopping 6.7%, making all the financial targets basically unattainable.
However, the Greeks could be seriously miscalculating. According to quality Dutch newspaper NRC Handelsblad (subscription needed), seven or eight eurozone countries are losing patience with Greece. These countries are the Netherlands, Finland, Germany, Estonia, Austria, Luxembourg and Slovakia.
The Greeks have more or less until September to get the austerity and privatization program back on track, although there is a first possible banana peel on August the 20th, when the Greeks have to reimburse the ECB and other eurozone central banks (principal and interest) to the tune of 3.5B. That's money the Greeks don't have.
But, since politicians are not keen to come back from holiday to sort this out, it's possible something will be found to get over this bump. However, the summit directly after the Dutch elections and the German Constitutional Court decision about the EMS (September 12) there will be no place for hiding.
By then, austerity measures to the tune of 11.7 billion euro have to be identified. If that isn't filled in to the satisfaction of the Troika, the eurozone leaders have to make the rather monumental decision whether to provide the next tranche of the second bailout program. Pasok, the socialist party that joined New Democracy to form the government, is already threatening to leave.
Greece cannot be kicked out of the euro, but simply closing the credit line will force the Greeks to go to the ECB, but they do not have sufficient collateral of sufficient quality to get very far there either. A political decision will have to follow, as it would be extremely awkward for unelected ECB officials to take such a monumental decision.
IMF urges the ECB to take action
And if these problems are not enough already, we have Spanish 10 year yield back over 7% this (Thursday) morning. While this doesn't trigger any immediate crisis, it's also not something that can last forever, or even for very long.
The situation is sufficiently critical for the IMF to urge the ECB to take more action:
"The ECB can provide further defences against an escalation of the crisis," the IMF report said. "These could include policies to support demand in the short run and fend off downside risks to inflation, as well as measures to ensure monetary transmission, currently impaired by financial stress in some countries." "And to further strengthen its financial markets role, the ECB could also be given explicit responsibility for financial stability and full lender-of-last-resort functions, thereby eliminating bank-sovereign linkages present in the current Emergency Liquidity Assistance scheme," it added. [The Telegraph]
All sensible, but what makes more sense to us is the following:
The ECB could also embark on further sovereign bond purchases of countries that are under market stress - its Securities Market Programme (SMP). "A well-communicated re-activation of SMP purchases would likely carry strong signalling effects which might mitigate the need for very large purchases. The benefits from lower yields would also ease collateral constraints on official and interbank lending facilities," the IMF said. [The Telegraph]
We've long argued the latter, a mere announcement of a strong backing of Spanish and Italian debt would significantly decrease the need for actual large scale interventions. If there is any part in the world where QE would be effective, it's the eurozone. With Spanish yields over 7% and reform programs in Spain, Italy, Ireland, and Portugal more or less on track, what are they waiting for?
Well, perhaps they're just waiting for the Greek scenario to play out. If Greece is more or less forced out of the euro, a dramatic announcement from the ECB could enormously reduce the risk of contagion and fall-out. This is of course speculation on our side, but are there good arguments against this?