Greece Off the Boil but still a Never-Ending Story

As a lightening rod for the global capital markets, Greece has surrendered.  It role being taken up by China rough transition or the Fed's continued reluctance to hike rates six years since the recession ended and despite the achieving of unemployment levels rarely seen.  

However, the Greek project is far from complete.  Greece still has to approve and implement far-ranging reforms, and commit to new austerity measures in order to free up funds and recapitalize the banks.  Every time Prime Minister Tspiras submits a new reform bill, the political fabric frays.  

Over the weekend, Tsipras tightened his control by facilitating the election of three cabinet ministers to the leadership committee of Syriza.  This strengthened his hand to submit the latest package of reforms to parliament late yesterday.   A member of parliament from the junior coalition partner immediate threatened to abstain.  The leader of center-right New Democracy balked, claiming his party would not vote for "recessionary measures.”

The package of reforms are part of the "prior actions" agreed upon with the EU and IMF and are required for the disbursement of another 2 bln euros of aid.   Many of the measures had been rejected or diluted by Syriza or prior governments.  They include scrapping concessions that were previously made for special groups.  Among the most onerous actions is the 10% cut in pensions for retired Greeks who have not reached the new statutory retirement age of 67.  It also eliminates a small basic payment to retirees without pensions.  In addition to increasing the tax rate for rented properties, property owners are responsible for tax on rents owed but not collected. 

This process will be repeated next month with additional reforms and taxes.  In the first round, farmers will lose their fuel subsidies.  Next month's package will close the loophole that has taxed farm income at half the standard rate.  Not only will the current tax rate double, but it must be paid in advance.  

While Greece is servicing its official debt via the new loans, it is still stiffing the suppliers of goods and services to the government.  The latest figures cover August.  The general government was in arrears by 5.9 bln euros, up about 170 mln euros on the month.  This includes about 800 mln euros of unpaid tax rebates.  

Greece still cannot get any breaks.  The ECB reportedly is considering requiring Greek banks to have greater regulatory capital to pass the upcoming stress tests.  Last year it required Greek banks to have 8% Tier 1 capital and 5.5% under adverse conditions.  It has not been decided yet, but reports suggest that it could be 9.5% and 8.0% respectively.     

The reform package and next month's are needed to free up funds for the bank recapitalizations that are still anticipated to be complete by the end of the year.    As part of the precondition for recapitalization funds, senior bank bond holders may still vulnerable.  Shareholders have been largely wiped out as several large banks have seen their shares fall by more than three-quarters this year.

Greece's 10-year bond yield has fallen below 8% this month.  This is the lowest level since last December.   While there may be scope for further declines, the bulk of the move is past.  Lower yields will likely require something new.    Greek stocks have not been outperformers.   Athens Stock Exchange is off 14.5% over the past three months, which make its one of the worst performers in Europe over this period.    Nor has it played much catch-up over the past month.  It has risen 1.1%, which is less than most of the bourses, but Germany. 

We were one of the few that did not expect Greece to leave EMU, but we recognize the situation as terribly fragile.  The political stresses caused by the economic demands were anticipated, and we fear that the worst still lies ahead. 

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