Since the beginning of September, yield on the Greek 10-Year bond has gone from 5.53% to 8.05% with a spike high of 9.28%.
Inquiring minds may be wondering what’s going on. More than likely yields are up for a number of factors.
- Rise of Syriza
- Chance of new elections
- Greece needs another bailout
Points number 1 and 2 go hand in hand.
Alexis Tsipras, head of the Greek radical-left party Syriza is in a substantial lead in the polls. Syriza wants to end austerity and threatens to renegotiate the bailout.
The next election for prime minister is not scheduled until June 2016, but a February 2015 presidential election (a largely ceremonial position) threatens to upset the cart. Greek law requires a backing of 180 members of parliament to nominate a president, but support for current prime minister Antonis Samaras has dwindled to only 150 seats.
If Samaras falls short, parliament will dissolve and then a new election for prime minister will take place.
Syriza Leader Prepares for Power
Given the above election backdrop, Syriza Leader Alexis Tsipras Prepares for Power.
Alexis Tsipras, leader of Greece’s far-left Syriza party, recently traveled to Frankfurt and Rome to meet European leaders. He is softening his confrontational tone with Greece’s international lenders. Tsipras has a drafted an agenda for the first 100 days of a future government.
The 40-year-old former student Communist is acting like a prime minister in waiting.
Syriza, once a fringe far-left movement, is now the most popular party in Greece, representing the many voters who feel punished by the country’s EU/IMF bailout. Last May, Syriza won the European elections, beating the ruling center-right New Democracy, and putting into question its political legitimacy.
In May, the party easily won European elections and gained the governor’s seat for Greece’s most populous region. Today, it polls higher than any other party, leading by a margin of between 4 and 11 points over Prime Minister Antonis Samaras’s conservatives. One poll shows Tsipras as the most popular political leader in the country.
“The big change has begun. The old is on its way out. The new is coming,” Tsipras thundered in a recent speech to parliament. “No one can stop it.”
Key to Syriza’s ascent, party officials say privately, is a calculated effort to moderate the radical leftist rhetoric that prompted Der Spiegel to name Tsipras among the most dangerous men in Europe in 2012.
The party still rails against austerity measures and a bailout-driven “humanitarian crisis”. It wants to reverse minimum wage cuts, freeze state layoffs and halt state asset sales.
But Syriza no longer threatens to tear up the bailout agreement or default on debt. Instead, officials say it supports the euro and wants to renegotiate the bailout by using the same pro-growth arguments of partners France and Italy.
Tackling Greece’s mountainous debt remains at the top of the party’s agenda. But talk of a debt “default” is gone, replaced with “renegotiation”. Syriza wants Europe to write off a big chunk of Greece’s 318 billion euros of debt – worth 175 percent of GDP – on a recognition that Greece’s problem is Europe’s problem too.
Other proposals include linking debt repayments to economic growth, an aggressive ECB policy of buying government bonds and excluding the roughly 38 billion euros spent to prop up Greek banks from national debt.
Some European officials say this is pie-in-the-sky thinking. Bailed out twice with over 240 billion euros over four years, Greece’s prospects have improved since it nearly crashed out of the euro but it still needs aid and lacks full market access.
One senior EU official, speaking on condition of anonymity because of the sensitivity of discussions between Greece and its lenders, said that Greece is not in a position to negotiate.
Greece in Need of Third Bailout
Having already thrown €240 Billion at Greece over the last four years, the Greek patient is still quite ill as Europe Debates Third Bailout Package for Athens.
“The era of bailout packages is ending,” Samaras promised in September during an appearance in Thessaloniki. “Greece is now welcoming the new Greece.”
Samaras knew the line would guarantee him applause from his audience, but the promise also came a bit prematurely. Following the announcement, Greece got a small taste of what it might mean were Greece were released from the oversight of the troika, comprised of the European Commission, the European Central Bank (ECB) and the International Monetary Fund. The more often Samaras spoke of a “clean solution,” the more yields rose on long-term Greek government bonds. At the beginning of September, the rates had been 5.8 percent, but they soon climbed to almost 9 percent.
It was the financial markets’ way of hinting that it is still too early to grant Greece full fiscal independence.
€2 Billion Shortfall
Last Wednesday in Paris, there was a minor uproar when troika officials made it known that they felt Greece hadn’t fulfilled conditions for the payout of the final tranche from the second bailout package. Athens’ international creditors determined the country will fall around €2 billion ($2.5 billion) short of reaching its commitment of not exceeding a budget deficit of 3 percent of gross domestic product.
Inefficiency often associated with Greece remains a fact of life in many areas, despite massive European development aid. The country still lacks important institutions, including a reliable national land registry office where the size of properties and their owners can be registered in a legally binding way.
‘We’ve Lost Another Year’
Ongoing uncertainty about property ownership is considered to be one of the greatest hindrances to development in Greece. In response, the EU dispatched experts from the Netherlands to help Greece establish a functioning system. Earlier this year, the project was put out to a public tender, but the Greeks later simply cancelled it. The financing of the land registry offices was also suddenly questioned, even though they could actually help generate revenues for the country.
“We’ve lost over a year once again,” says one fatigued EU official in Brussels. Although the government had agreed it would make progress on the land registry offices, the official speculates that the plan likely fell afoul of one of the local oligarchs that pulls the strings in the background. The vaguer the better for black market dealings.
Progress is slow and tedious, and German Finance Minister Wolfgang Schäuble believes it has to be safeguarded with a third bailout package for Greece. At the end of last week, a group of finance ministry deputies from the euro-zone countries met in Brussels to discuss a so-called precautionary credit line for Greece that would be provided by the Euro Stability Mechanism, the common currency’s permanent backstop fund.
There is already broad agreement on the scope of the aid. Greece is expected to be granted around €10 billion, and the ESM will not be required to raise any additional funds for it. Some €10.8 billion is still left in the current aid package for Greece. That funding had been earmarked for shoring up the capital resources of Greek banks, but so far it hasn’t been used.
Now this money is expected to be redirected so that it can be used to provide financing for the Greek national budget. But unanimous approval from the ESM’s board of governors is required before that action can be taken.
Cost of Protection
To avoid the loss of €40 Billion or so, the Troika threw hundreds-of-billions of euros at Greece, and then when that failed, more hundreds-of-billions in a second bailout.
We now see that did not work, so to protect the €240 total thrown at Greece, the EU is debating another €10 Billion.
Room to Negotiate
Curiously, a senior EU official, speaking anonymously said that “Greece is not in a position to negotiate“.
Watch what happens when Tsipras wins the snap election and demands haircuts.
Greece is at or close to a current account surplus excluding interest on €240 bailouts. Thus, no longer needing foreign support for funding, Greece is in a strong position to tell the Troika to go to hell. And I encourage Greece to do just that.
The major problem is Greece still needs massive reforms to make an abandon-the-euro scheme work. Unfortunately, those are exactly the reforms Tsipras will fail to deliver. Of course Samaras failed to deliver any significant reforms either.
Thus, the entire setup is unstable. Nonetheless, when faced with the prospect of Greece walking away from €240 billion, I expect there is going to be plenty of room to negotiate.
Mike “Mish” Shedlock