In memory of Dr. Andreas Höfert

Fifty shades of Greece

| Posted by: Andreas Höfert | Tags: Follow UBS, Andreas Höfert

At last Friday’s Eurogroup meeting in Riga, Greece was supposed to deliver a comprehensive, detailed list of reforms. This would have finally unblocked the last EUR 7.2bn of the second bailout program and avoided serious trouble until the end of June. But it was already clear at the beginning of last week that this deadline wouldn’t be met.

The deadline for this famous list has been postponed yet again. Greece had committed to submit a reform list by 24 February, and then by 30 March. Both times, submissions were insufficiently detailed or credible, and new deadlines were set.

The delaying game continues. Now the list is due for the next Eurogroup meeting on 11 May – incidentally one day before a EUR 776m payment to the International Monetary Fund (IMF), which always gets its money.

The more a deadline is postponed, the deadlier the line should become. In Greece’s case, the biggest fear is that the country is running out of cash. But this story has been with us for the last three months. Indeed, on 4 February, Bloomberg was already writing in a headline that “Greece may run out of cash as early as end of March.” Then on 2 April, Fortune headlined an article, “Greece says it will run out of cash by April 9.”

Before the Riga summit, German Chancellor Angela Merkel expressed concern that “everything must be done to keep Greece from running out of cash before an agreement is found.” But the IMF seemed more relaxed. Its European Department Director, Poul Thomsen, affirmed last week that “Greece will probably run out of money by June,” expressing consensus among Eurozone and Greek officials.

Beyond politicians stating the obvious, developments show that the Greek government is running out of cash and has to scrape together every last euro cent to honor its financial obligations. On 20 April, the government signed a decree giving it access to the cash holdings of state bodies, which might help it pay state employees and retirees an estimated EUR 1.7 billion.

We therefore now estimate the likelihood of Greece defaulting on parts of its debt to be 50–60% over the coming weeks. However, Greece leaving the Eurozone is still not our central scenario. Our subjective probability of such an event occurring in the next 12 months remains 20–30 %.

Given the high default likelihood, the question of plan B has now been raised. “There is no plan B, there must not be a plan B,” said Pierre Moscovici, European Commissioner of Economic Affairs, on television last Friday before the Riga meeting. Greek Finance Minister Yanis Varoufakis echoed him, “Any mention of a plan B is profoundly anti-European.”

However, Jeroen Dijsselbloem, who leads the Eurogroup, affirmed on Saturday after the meeting, “In that context plan B has been mentioned.” To which the Slovenian Finance Minister, Dušan Mramor, specified, “A plan B can be anything.”

Perhaps the wisest words in that confusion came from the German Finance Minister Wolfgang Schäuble, “Questions about whether there are alternatives if the world ends or everything turns out differently than one wants, despite best efforts, shouldn’t really be put to politicians in positions of responsibility.”

After the famous “Grexit” and the less utilized “Graccident,” neologisms for the Greek situation emerge daily within the analyst community. Worth mentioning is “Grimbo” – a contraction of Greece and limbo, a situation in which Greece would default but would remain in the Eurozone. Also notable is a rampant form of “Grexhaustion.”

My own favorite is “Grhamlet” because – as did the tragic Danish prince – it signals procrastination and delayed decisions. But contrary to Hamlet, my fear is that “this be madness,” with no method in it.