September 19, 2011
Greece tranche decision delayed until October: Juncker
Eurogroup chairman Jean-Claude Juncker says decision to release sixth bailout tranche to Greece will be delayed until October; sovereign may default sooner than expected, says analyst
Eurozone finance ministers agreed on September 16 to delay a decision over the disbursement of €8 billion ($11 billion) worth of loans to Greece until October, raising fears the sovereign will default
Jean-Claude Juncker, chairman of the Eurogroup, was widely reported as saying the European Central Bank (ECB), International Monetary Fund and European Union would decide in October whether to hand over the sixth tranche of funding. The comments were made after a meeting between European finance ministers in Wroclaw, Poland.
The IMF was unable to confirm the comments, but said the mere fact the IMF mission to Greece had not yet completed its review suggested any approval of the next tranche was unlikely before October. The ECB also declined to confirm the validity of the comments.
The IMF was set to conclude its fifth mission to Greece on September 5, as part of a €109 billion bailout package agreed between Washington, Brussels and Athens on July 21, setting in motion a sixth trance of funding for the sovereign.
However, on September 2 the mission announced it had left Athens to allow the authorities to complete technical work related to structural reforms and the 2012 budget, saying it would not return until mid-September.
Although Greece's economy returned to growth in the first quarter of 2011, expanding by 0.2% compared with a contraction of 2.8% in the last quarter of 2010, it is widely expected the country will fail to meet the conditions set out in its programme and not qualify for the sixth tranche.
However, following a conference call between Greek prime minister George Papandreou, German chancellor Angela Merkel and French president Nicolas Sarkozy, there were suggestions Greece may receive the bailout funds even if they were unable to meet the conditions set by the programme.
Nevertheless, Jonathan Loynes, the chief European economist at Capital Economics, a consultancy based in London, says the probability of default for Greece had now increased. "We now think the [Greek] government may end up defaulting within months or perhaps even weeks.
With concerns about banks' solvency likely to increase as problems in the highly indebted economies intensify, banks could soon be forced to borrow more from the ECB and rein in their lending," Loynes said, in a note published on September 16.
Fears a Greek default could heavily impact European banks exposed to Greece has caused a large shift towards investments in dollar assets over the past week.
On September 15, major central banks reacted to the increased demand for dollars. In a co-ordinated effort, the ECB, Swiss National Bank, Bank of Japan and the Bank of England announced plans to conduct three US dollar tenders, each at a term of approximately three months covering the end of the year.
Jacques Cailloux, chief European economist at the Royal Bank of Scotland, based in London, says the monetary union was facing a co-ordination failure of "unprecedented scale".
"Euro area policymakers have continuously failed to understand the nature and scale of the crisis. A couple of months ago, there were still comments from policymakers saying this was not a crisis of the euro just a crisis of some sovereigns in the euro area. The lack of understanding about the contagion channels at play has led to a misguided policy response, and to a very significant underestimation of the total financial needs to preserve the system," Cailloux says.
The decision to delay the sixth tranche of Greece comes after US Treasury secretary Timothy Geithner called on European governments to stop fighting with the ECB, and to take decisive action to address the sovereign debt crisis: "What is very damaging from the outside is to see not just the divisiveness [in Europe] in the broader debate, about strategy, but the ongoing conflict between the governments and the central bank, and you need both to work together to do what is essential for the resolution of any crisis," Geithner, told finance ministers in Poland during a rare appearance at the eurozone finance ministers meeting.
His views were also shared by Christine Lagarde, the managing director of the IMF. On September 15, Lagarde called for world leaders to take a more united approach to address the three main challenges facing the global economy. "I believe there is a path to recovery, much narrower than before, and getting narrower. To navigate it, we need strong political will across the world-leadership over brinkmanship, co-operation over competition, action over reaction," Lagarde said in a speech at the Annual Meetings of the World Bank and IMF in Washington.
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