An internal Bundesbank report that has been leaked warns that Greece is going to need new funding next year. In some respects, this is hardly news. The IMF, part of the Troika of official creditors that been managing the assistance program, has been saying this for quite some time.
It has been the German government that has played this down, ostensibly due to the proximity of next month's election, but also part the standard operating procedure of the Merkel government, of waiting for necessity to force its hand.
The Bundesbank has been critical of Greek assistance programs since the start. In the report that has been leaked, the BBK reiterates its views the 1) there are risks to the current program; 2) Greek government compliance is "barely satisfactory" and there is "substantial doubt" about its ability to implement the necessary reforms; and 3) last month's agreement to provide additional funding was approved out of "political necessity."
While it seems that the BBK is critical of Greece, its real target appears to be the German government. Previously, some German contacts mentioned the possibility that Weidmann returns to Berlin after the election to be the new finance minister, but the leaking of this report, which was said to be the finance ministry, seems to undermine such a scenario. Instead, if there is a to be such a move, Joerg Asmussen, of the ECB's Executive Board, may be a more attractive candidate, especially given this SPD roots and the possibility of grand coalition government.. In recent months, we have detected a growing criticism of the Merkel government by the BBK.
The IMF seems to recognize more than the BBK the important progress achieved by the Samaras government in reducing its budget deficit. In fact, data out earlier today shows a small primary (excluding debt servicing costs) for the first seven months of 2013. The primary surplus of about 2.6 bln euros contrasts with the official target of a 3.1 bln euro deficit.
Including interest payments, Greece has run a deficit of a little less than 2 bln euros through July. The target was 7.5 bln euros. In the first 7-months of 2012, Greece recorded a budget shortfall of 13.2 bln euros. This year's performance has been flattered by the one off payment of about 1.5 bln euros given to the Greek government from the profits made by the ECB on its Greek bond purchases and distributed to member countries, which then passed it along to Greece.
Separately, Greece reported today that its economy shrank at an annual rate of 4.6% in Q2 after contracting 5.6% in Q1. This was a slightly smaller contraction than the market expected and may have been helped by the best tourism in six years.
The economy has shrunk by around a quarter since the crisis began and unemployment rose to a new record of 27.6% in May. There are other signs that the contraction is easing (industrial output year-over-year has been position in two of the three months in Q2, something that has not been seen since Q4 2007.
However, some critics note that the underlying behavior of tax payers has not changed. The IMF notes that last year, a full three-quarters of the self-employed professionals (includes doctors, lawyers, etc) reported income that was below the threshold to pay taxes. The privatization efforts are also well behind schedule.
The IMF has been sympathetic to an official sector haircut, if it was excluded. Even Merkel and other European leaders appeared to hold out the possibility of more debt relief for Greece if it achieves a primary budget surplus this year. The IMF reckons that Greece will need an additional 4.4 bln euros for 2014 and about 5.6 bln euros for 2015, assuming it can return to the capital markets in 2016.
The Greek government has no incentive to contradict the German government, especially given that Merkel is most likely to remain Chancellor, even if in a grand coalition government. Greece's finance minister has floated several trial balloons, such as issuing short-term bills to cover next year's gap, a new bond issue, or using some of the 6 bln euros left from the 50 bln that had been earmarked for bank recapitalization that was completed several months ago.
The Greek funding issue is likely to simmer for the coming weeks, but will likely come to a head soon after the German election as parliament debates the 2014 budget in early October.
Source: Marc to Market
