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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman.
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  • Will Greece Blow Up Before Election Day? 0 comments
    Aug 27, 2012 11:28 PM

    Samaras now has two to three weeks left to put together an austerity package worth about €14 billion ($17.5 billion) for the next two years. But politicians in Berlin and Brussels doubt whether his new course will produce results quickly enough.
    The troika will spend the entire month of September auditing the books in Athens. Meanwhile, staff at the European Council in Brussels are assuming that the summit of European Union leaders on Oct. 18-19 will be a showdown over Greece.
    The IMF is taking a particularly hard line in the negotiations. The fund's envoys feel that Greece's debts are not sustainable and are threatening to withdraw from the aid program altogether. The only alternative is for the public creditors, in particular the European Central Bank (ECB), to write off a portion of Greece's debt.
    The German government faces a dilemma. Chancellor Angela Merkel had made IMF participation a condition of any Greek bailout, but if public-sector creditors agreed to a debt haircut, it would cost Germany many billions of euros.
    For Merkel, that is out of the question, as is a third aid package or extending the current program by two years, as Samaras has requested. Both of the latter two options would cost additional money, and that, the chancellor fears, is something members of her own party and its coalition partners would refuse to support in the Bundestag. The scenario of a Greek withdrawal from the euro is looming.
    --Der Spiegel, Aug. 27th, 2012

    Once again, we are invited to witness another Greek cliff-hanger: Will Athens be bailed out (again), or will she default? The financial media are filled with speculation that, this time, Greece will be cut off. This is understandable, given that Greece has failed to implement any of the austerity or reform measures that she has repeatedly agreed to.

    Germany's economy minister has rejected calls for Greece to get more time to implement economic reforms, saying that Athens needs to respect the bailout deal reached with its international creditors. "What the Greeks have asked for, half a year or two years, that's not doable," said Roesler, who is also the vice chancellor in Angela Merkel's coalition government. He added that "time is always money" and all parties had agreed that additional funds for Greece weren't up for debate. (AP, 8/27/12)

    There is a lot of pressure on Merkel to toss the Greeks out. The Dutch and Finns are angry and making dire noises. Elements of Merkel's coalition are hostile to rewarding Greek defiance. Merkel's own finance minister said last week:
    "More time generally means more money, and that very soon means a new bailout programme. That would not be the right way to solve the fundamental problems of the euro zone."

    The Finns, Dutch and Germans are all saying no more money for Greece. They appear to be trying to psych themselves up for giving Greece the old sayonara.

    But I will make a bold prediction: Greece will be bailed out and won't get thrown out of the eurozone in October. This is because I can't imagine that Europe will want to have to deal with a Greek crisis in the middle of the Spanish crisis. And also, as I have said before, because the potential ramifications of a Greek default are unknown, Grexit is still a potential catastrophe. To let Greece go now would be very risky. The cost of keeping Greece on life support would be cheaper and safer.

    But, assuming I am right, how can Europe manage to reposition Greece's total failure as a success story? That is what Merkel and Hollande must have on their minds right now.

    The party line right now is that Europe will decide nothing until the Troika makes its report in October and the ruling circles have a chance to look at what the Troika says.

    So, if Europe wants to prevent (postpone) a Greek explosion, at what point in the process should it intervene in order to ensure the right outcome? The obvious thing to do would be to fix the Troika and ensure that its report will say that Greece is making progress and will succeed if given more time and money (don't laugh). That might solve the problem, but can they fix the Troika?

    The Troika consists of the European Commission, the ECB and the IMF. The fix will be in at EC and the ECB and they will happily go along. But the IMF is harder to influence and is by no means a European stooge. The French head of the IMF will want to play ball, but can she control her team? She can certainly send signals, but it would be risky to leave any fingerprints.

    In March, Lagarde said:
    "The combination of ambitious and broad policy efforts by Greece, and substantial and long-term financial contributions by the official and private sectors, will create the space needed to secure improvements in debt sustainability and competitiveness. These actions, together with a significant strengthening of the financial sector, will pave the way for a gradual resumption of economic growth."
    So I think we know where she stands, but we don't know if she can control her team.

    The Troika's most recent statement on Greece (Aug. 5th) was somewhat noncommittal, but not negative:

    Staff teams from the European Commission (NYSE:EC), European Central Bank (ECB) and International Monetary Fund (NYSE:IMF) concluded today a visit to Greece to discuss with the new authorities the economic policies needed to restore growth and competitiveness, secure a sustainable fiscal position, and underpin confidence in the financial system in line with the objectives of the economic adjustment program that is being supported by the three institutions. The discussions on the implementation of the program were productive and there was overall agreement on the need to strengthen policy efforts to achieve its objectives. The Greek authorities are committed to proceeding with determination in their work over the next month, and the EC/ECB/IMF staff teams expect to return to Athens in early September to continue the discussions.

    I predict that we will see similar meaningless mush from the Troika in October. It will issue a "balanced" statement, expressing dissatisfaction with Greece's progress, but leaving open the option of providing Greece with more time, which is what Europe wants to hear.

    If the Troika report is negative and can't be persuaded otherwise, then its report would have to be buried or misread, but that would be awkward and undesirable. Remember also that the IMF has to look over its shoulder at its largest shareholder, the U.S. Congress, which loathes the IMF and seeks to prevent more European bailouts.

    Since October is the American campaign season, and because Obama certainly doesn't want a Greek crisis before the election, I think that the fudge will go through. Greece will be given more time, along with more faux-serious "benchmarks" which will also have to be fudged in due course. The objective is not to fix Greece, but to postpone it.

    If my prediction turns out to be wrong, then I would reiterate that a Greek exit is a Black Swan, and not to be taken lightly. If Greece exits before election day, bad news for Obama. But I just don't see it happening.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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