Greece Dodges Economic Bullet With Progress Toward Deal

Bloomberg

by James G NeugerStephanie BodoniKarl Stagno Navarra

8:32 PM EEST

May 11, 2015

Greece handed the European Central Bank an excuse to maintain the life support for its financial system by persuading its skeptical German-led creditors it’s serious about delivering the policies needed to escape a default.

Less than three weeks after a Greek aid meeting broke up in taunts and acrimony, Finance Minister Yanis Varoufakis assured euro-area governments that his country is aiming to strike a bargain to win the final installments of its 240 billion-euro ($268 billion) aid program.

“We are making faster progress,” Dutch Finance Minister Jeroen Dijsselbloem told reporters in Brussels on Monday after leading a meeting of euro ministers. “I’m not satisfied but just a bit more optimistic.”

Pressure on the two sides had intensified with the ECB due to reassess the emergency liquidity lines keeping the Greek banking system in business on Wednesday. Although some central bankers are pushing for stricter terms, it’s now unlikely that policy makers will decide to restrict funding this week, according to two European officials.

With global bond markets sliding, the yield on Greece’s notes due 2017 rose 17 basis points to 21.4 percent at 12:04 p.m. local time. The Athens benchmark stock index was little changed.

Greece said it will surmount another hurdle this week, when it repays about 750 million euros to the International Monetary Fund. A transfer order was put in Monday, two Greek officials said. More payments to the IMF and the redemption of bonds held by the ECB beckon between now and September, though Varoufakis suggested Greece may not get that far without help.

“The liquidity issue is a terribly urgent issue,” he said. “We are talking about the next couple of weeks.”

Bonds Rise

Dijsselbloem said the 7.2 billion euros Greece is counting on could be parceled out bit by bit, as the government passes pieces of economic legislation. “There are some time constraints, there are liquidity constraints, hopefully we’ll reach an agreement before time runs out or money runs out,” he said.

Monday’s accord brought Greece back to where it was on Feb. 20, when Tsipras’s freshly installed government committed to the budget targets he had scoffed at during the campaign. In return, Greece was granted a bailout extension until the end of June, giving it time to adjust economic policies.

“At some level you see there’s a willingness to do a deal,” Hans Humes, founder of Greylock Capital Management fund, said in a television interview. “You get the sense that the Greeks have really already made the decision at the political level to go forward with the reforms.”

Greece has made progress on value-added tax reform and revenue management, European Economic Commissioner Pierre Moscovici said. Pension benefits and labor market deregulation - - sensitive issues for Syriza’s rank and file -- remain to be settled.

Varoufakis signaled that he thought the euro area and the IMF might be prepared to compromise on labor-market rules.

Possible Referendum

Domestic backing for Tsipras’s tactics has been sapped by Greece’s economic ordeal and the potential choice between a shrunken welfare state inside the euro or an unknown future outside it. Fifty-four percent of Greeks back the government’s strategy, down from 82 percent in February, a Marc poll for Efimerida Ton Sintakton showed Saturday. Still, Tsipras’s Syriza party, which rose to prominence by denouncing the economic status quo, continues to out-poll rivals.

Tsipras last month floated the prospect of a referendum or a sudden national election to clinch public support for a possible deal. A referendum might enable Tsipras to silence opponents of a compromise inside the Syriza camp, since it would pick up support from the broad majority of Greeks determined to stay in the euro.

Varoufakis said such a move is not “on the radar” for the moment.