Greek worries intensify as last chance for agreement nears

Monday's meeting of European finance ministers looks like the last chance for some form of agreement on the next leg of Greece's €86 billion bailout, before Dutch and French elections complicate negotiations. Anything can still go wrong with seemingly unsolvable differences between the European authorities, the International Monetary Fund and the Greeks.

The worries are certainly reflected in the sharp sell-off of Greece's €2 billion bond maturing in July 2017. As befits a serious credit event, Greece's yield curve has inverted, where soon-to-mature debt yields rise above those for longer-dated bonds, reflecting the view that if Greece can make it past the next couple of years, it is more likely to make it in the longer term.

Gauging sentiment by looking at the Greek bond market isn’t straightforward as volumes are low, with just €26 million trading during January on the inter-dealer platform. Even so, this loss of faith is overblown.

European economies, including Greece’s, are in better shape since the highly-fraught 2015 bailout pushed the currency union to the brink and Greek yields substantially higher than they are now.

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Debt repayments

But the real issue is that, politically, there is every reason to suggest agreement on the bailout terms, which is needed to release more aid to meet about €8 billion of debt repayments by July. It’s hard to see who wins if the parties walk away. The risk in letting it all go now after all the hard yards is far higher than the embarrassment of extending and pretending one more time.

Eurogroup chairman Jeroen Dijsselbloem said on February 10th he didn't feel a "crisis atmosphere". If a deal isn't cobbled together, then work will continue in the coming weeks, he said.

The creditors’ normal veneer of agreement was fractured in January when the IMF released its searing assessment of Greece’s “unsustainable” debt. But its insistence on austerity looks itself unsustainable in the face of the Syriza government’s pledge for “not a single euro more”.

More to the point, press reports that it may contribute up to €5 billion to a rescue, and that managing director Christine Lagarde will meet German chancellor Angela Merkel on Wednesday, pave the way for the Germans to get on board. Dr Merkel would do well to put the issue to rest now, lest it become a flashpoint at September's elections – her political opponent, Martin Schultz, has been arguing for Greek debt relief for years.

The real pull for the IMF will be avoiding writing off the billions they have already contributed. Ms Lagarde's also facing some time pressures – US president Donald Trump has yet to opine on the situation, and the IMF will want to control the resolution.

Government institutions

Furthermore, this is a knife fight between government institutions to execute a plan that’s already been agreed – the complexities around private sector involvement have already been resolved. And with Syrzia trailing in the polls the government won’t likely seek negotiating leverage by calling an election, as happened in 2015.

Greece faces a few maturities in the coming months, but the heavy lifting is in July, when €6.2 billion of debt matures. That’s still small beer compared with the €300 billion or so outstanding. If there is to be any chance of long-term redemption, Greece has to be able to fund itself again in the capital markets, something all parties surely want. The bailout has to remain on track until the country can issue on its own two feet.

The prospects for agreement don't imply that Greece has any chance of being included any time soon in the European Central Bank's quantitative easing programme – that's a very distant dream, as I have argued. But July's inflection point is still some way to go and the European Union has survived tougher tests. Expect political reality to overcome the fear of pouring yet more good money after bad.

Bloomberg