Greece’s Day of Reckoning Inches Closer as Payments Loomby Nikos Chrysoloras

12:01 AM EEST

April 27, 2015

Bloomberg

Greece is struggling to amass cash to pay its pensioners and employees this week, as the country and its creditors resume efforts to break the deadlock in bailout talks.

Europe’s most-indebted state is counting on deposits of local governments, cities and other funds to meet end-of month payments of over 1.5 billion euros ($1.6 billion) after euro area finance ministers on Friday said they won’t disburse more aid until bailout terms are met. That may further strain liquidity buffers at banks, after households and companies withdrew almost 1.3 billion euros in savings last week, according to a person who’s not authorized to speak publicly on the matter.

“Despite the inelegant way the government did it, we will deposit our reserves at the Bank of Greece,” Yiannis Boutaris, Mayor of Thessaloniki, Greece’s second-largest city, said in comments on Mega TV. As polls show that a large majority of Greeks wants to stay in the euro zone, keeping the country in the currency regime should be the governing Syriza party’s “red line,” he said.

Greece’s anti-austerity coalition has fought to unlock aid since striking a deal to extend its bailout program in February. The government has repeatedly expressed confidence that a deal was imminent, only to be rebuffed by euro-area officials seeking concrete steps. Last week was no different: days after Finance Minister Yanis Varoufakis said views were converging, his counterparts across the region hit him with a volley of criticism.

Greek bonds fell on Friday, sending yields on three-year notes up 144 basis points to 26.3 percent.

Systemically Manageable

Greek Prime Minister Alexis Tsipras held a call with German Chancellor Angela Merkel and Eurogroup President Jeroen Dijsselbloem to discuss progress in negotiations, a government official in Athens said Sunday. Germany’s Bild newspaper reported Monday that Tsipras asked Merkel to convene an emergency European Union leaders’ summit. A Greek government spokesman denied the report in a text message.

Support for the government’s confrontational stance fell to 46 percent in a University of Macedonia poll for Skai TV published on Tuesday, compared with 56 percent a month earlier. Two polls published over the weekend showed a most Greeks want the government to strike a compromise with creditors.

According to a Kappa Research survey published in To Vima weekly, 71.9 percent of those surveyed said a deal with creditors would be best for the country, while 23.2 percent said they prefer a clash. An Alco survey in Proto Thema newspaper showed that half of respondents want a compromise even if creditors reject Greek government demands, while 36 percent said the government should opt for a “rupture.”

Greek Default

As the deadlock in talks over the disbursement of emergency loans to Greece continues for the eighth consecutive month, the consensus at the International Monetary Fund meetings in Washington this month was increasingly that a Greek default would be systemically manageable, UBS Chairman Axel Weber told the Swiss newspaper Neue Zuercher Zeitung.

According to the Alco survey published Sunday, 63 percent of respondents said the risk of default is real, and 48 percent said they are worried about leaving the euro area.

State coffers will be further tested on May 6, when Greece needs to find 200 million euros for an IMF payment.

The Governing Council of the European Central Bank may debate the same day whether to raise the haircut on Greek collateral posted against Emergency Liquidity Assistance, a decision that could worsen the country’s cash squeeze. ECB staff have already proposed options for increasing the discounts imposed on the securities banks post as collateral when borrowing emergency cash from the Bank of Greece.

Liquidity Shortage

Bleeding deposits and unable to access ECB’s regular financing operations while the bailout review remains stalled, Greek lenders currently rely on a 75.5 billion euro ELA lifeline.

The assistance is subject to weekly review by the ECB. Any reduction of the value of collateral that Greek banks pledge may mean the days of ELA are numbered, further increasing pressure on the government to make a choice between complying with creditors’ demands or imposing capital controls.

“It is perfectly feasible and absolutely necessary to reach an intermediary agreement,” Greece’s deputy prime minister Yannis Dragasakis said in an interview with Avgi newspaper Sunday. If the cash-flow deadlock persists “we will be forced to adopt on our own measures, which we are currently trying to avoid,” Dragasakis told the Syriza governing party-affiliated newspaper.

A spokesman for the Greek finance ministry declined to comment on the country’s cash reserves and liquidity situation.

Negotiations Resume

Negotiations between Greece and creditor institutions will resume with a call on Monday, and they will meet in person on Wednesday in a bid to speed up the process, a Greek official said Sunday.

“We are increasingly convinced that unless a deal involving sub-tranches is struck in the next few days, Mr Tsipras’ solution will be to call early elections,” Michael Michaelides, a strategist at Royal Bank of Scotland Group Plc in London, wrote in a note to clients on Friday. “Elections will mean further noise, but given strong Greek public support for the Euro, we expect a probable Syriza victory with a new mandate to strike a deal will ultimately prove positive to finding a final agreement.”