Greece: the challenges ahead
Athanasios Vamvakidis, Foreign Exchange strategist, Sphia Salim, Rates strategist and Ruben Segura-Cayuela, Europe economist at Bank of America Merrill Lynch Greece argue that although Greece has paid the IMF this week, funding pressures likely will become more severe in the next few weeks. As the market is puzzled with the Greek government’s strategy, the see three challenges ahea: A Eurogroup deal on April 24, approval of the deal by the Greek Parliament, and providing short-term funding for Greece.
Greece has paid the IMF
Greece has repaid the €458mln loan due to the IMF this week, following weeks of uncertainty of whether the country will be able to do so. The central government has been borrowing from cash buffers of various state entities. Press reports in Greece also talk about internal discussions in the government of whether to make the payment at all, even after they had the money, and the consequences of a default to the IMF. As we have recently argued, missing an IMF payment could trigger a chain of events that would lead to an overall Greek default. It seems that the Greek government reached the same conclusion and decided to pay the IMF.
But cash is running out
The general government’s cash buffers are running out. The difficulty to find the money to pay the IMF this week suggests to us that it will be even harder to find money to pay €200mln for interest to the IMF on May 1st and €763mln for principal to the IMF on May 12. Greece will also have to keep paying pensions and wages at the end of every month-about €1.5bn, rollover T-bills without foreign buyers-€1bn for the rest of April, €2.8bn for May and €5.2bn for June, and pay interest of €194mln to GGB holders and €80mln to the ECB on April 17 and 20 respectively.
Banks at the mercy of the ELA
The situation in the banking sector is also getting worse. Greek banks have lost 15% of deposits since August, after having lost 1/3 of their deposits since the beginning of the crisis. Target 2 liabilities of Greece with the ECB have increased by €44bn from August to February, and most likely increased further since then. Not surprisingly, credit growth remains well into negative territory, at -2.8% in January. The ECB has been increasing the ELA limit for Greece every week, but by much less than what the Bank of Greece has been requesting, according to press reports. Our bank analyst has recently discussed four scenarios for Greek banks, three of which suggest the need for more capital.
The most frequent questions we get from investors about Greece have to do with the government’s strategy. They are concerned about the lack of progress in the negotiations, difficulties to agree on a credible reform list, conflicting statements from government officials on reforms that the ministry of finance has proposed, and the fact that the Greek government has not implemented any program reform so far, despite statements that they agree with two-thirds of what is in the program and that they will be able to implement reforms because they are not beholden to vested interests. Investors are also puzzled about Greece’s friendship with Russia, strong government statements about German war reparations, and warnings by government ministers about inability to keep terrorists out of Europe if the crisis deteriorates. Regardless of whether the Greek government is right or wrong on these issues, most of the investors we talk to cannot see how focusing on these issues helps Greece to make its case for more official funding from the rest of Europe. The Greek government comes across as if it has the wrong priorities, or is just trying everything possible to avoid reforms, losing friends in the process.
The real economy is suffering
The real economy is already suffering from the prolonged uncertainty. The last IMF report on Greece (June 2014) was projecting real GDP growth of 2.9% in 2015. We recently downgraded our 2015 growth forecast to 0.6%, because of brinkmanship and uncertainty, and highlighted downside risks. Data so far this year suggests that the outcome could be far worse. We were expecting, at best, a similar GDP print in Q1 2015 to the one in Q4 2014, but data so far suggests that the contraction in Q1 may be double our expectation. Just marking to market based on such a Q1 outcome would take our GDP forecast for 2015 to 0%, with risks for a recession.