It's Sausage Time in the Greek Debt Crisis

02/18/2015 5:30 pm EST


Jim Jubak

Founder and Editor,

Like you don't want to know what's inside a sausage, you don't want to know what's going into this Greek debt deal, but MoneyShow's Jim Jubak points out that it's all about what gets stuffed in the casing by this point.

It's sausage time in the Greek debt crisis.

We don't really want to know how the sausage—in this case a deal or no deal to head off the pending Greek liquidity crisis—is made.

But we're at a point in this crisis where it's all about the details of what gets stuffed in the casing.

So here are more details than you or I ever wanted to know about how EuroZone institutions make decisions and the make or break minutia of proposals from Greece and the EuroGroup of finance ministers.

First, the sticking point that led to the collapse of talks on Monday remains the same. Greece wants an intermediate agreement that would extend enough new cash to Greece to keep the country running and then a new bailout plan. The country's creditors among EuroZone governments—and especially the Germans, Finns, and Dutch—want Greece to request an extension of the current bailout deal.

The difference isn't just semantics. The new Greek government wants to be able to renegotiate key parts of the bailout plan—that is, after all, what Prime Minister Alexis Tsipras ran on. A key part of that renegotiation, Greek Finance Minister Yanis Varoufakis has said, would be a promise to maintain a primary budget surplus—that's a surplus before interest payments—equal to 1.5% of GDP. That's way less than the 3% budget surplus target in the current bailout program. Greece also wants to halt the privatization program and at least some of the labor market reforms in the current bailout program. All that is anathema to the German government and the EuroGroup finance ministers are unlikely to approve any loan extension that doesn't include specific promises to meet the targets in the current bailout program during the period of the loan extension. In other words, no more cash if all Greece intends is to repudiate the bailout program after it has received a reprieve.

Second, the European Central Bank, which is meeting today, is badly divided on whether or not to extend or even continue the Emergency Liquidity Assistance program that is currently keeping Greek banks afloat. The good news, from the Greek point of view, is that it takes a 2/3 vote to shut down the flow of money to Greece. It's unlikely that countries that favor being as tough as possible on Greece have enough votes for that. At the same time, those countries that might be inclined to give Greece more breathing room by raising the current 65 billion euro cap clearly don't have the votes for that. In the final event, the bank voted this evening to raise the cap a token 3.3 billion euros. I think that was a compromise driven by the inability of the tough on Greece camp to shut down the Emergency Liquidity Assistance program to Greece. The inability to do that gave extra clout to those arguing to give Greece more time. That extra 3.3 billion euros also lets the bank step back from imposing a solution on the crisis and puts the problem back in the laps of EuroZone's politicians.

Third, Greece was expected to submit its proposal for funding extension today, but news this morning is that the proposal won't be forthcoming until Thursday. That gives the EuroGroup finance ministers just one day before what was widely thought to be a Friday deadline. Got me what the reason or point of the delay is. It does leave more time for putting together a proposal that includes enough concessions so that it isn't dead on arrival or it might just be another ploy from Greek Finance Minister Varoufakis to increase the pressure on the EuroZone countries.

Of course, Greece faces mounting pressure too. This morning US Treasury Secretary Jack Lew called Varoufakis and urged him to reach a solution. And today Fitch Ratings warned that the crisis could well push Greece back into recession.

European financial markets continued to behave as if a deal is likely. The French CAC index closed up 0.86% today; the German DAX was ahead 0.52%, and the Spanish IBEX 35 gained 0.93%. Stocks in Athens closed higher by 1% and the 10-year Greek government note rose in price taking the yield down to 10.4% from Tuesday's 10.6%. Greek bank stocks rallied strongly with Attica Bank up 7.6% and the National Bank of Greece gaining 6.7%.

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