Europe Considers Emergency Debt Writeoffs As Greece Faces "Ungovernable Chaos"

Submitted by Tyler Durden: Greek FinMin Yanis Varoufakis is in Luxembourg on Thursday for a meeting with EU finance ministers. Some EU officials indicated earlier in the week they hoped some progress on the stalemate between Athens and Brussels could be made at the meeting, but Varoufakis, whose track record at Eurogroup summits is not great, said he would not be presenting a new proposal at the talks, setting the stage for an emergency meeting between the EU’s top brass over the weekend and the possible imposition of capital controls to stem the flow of deposits out of the ailing Greek banking sector. 

Protesters took to the streets in Athens on Wednesday evening, marking a fresh wave of anti-austerity protests while Zoe Konstantopoulou, the president of the parliament, chided Bank of Greece governor Yannis Stournaras for a report in which the central bank warned of an “uncontrollable crisis” and “soaring inflation” if a deal with creditors isn’t struck soon. “With his report today, the governor of the Bank of Greece not only exceeded the boundaries of his institutional role, he is attempting to contribute to the creation of an asphyxiating framework in the moves and negotiating abilities of the Greek government,” Konstantopoulou said.


There’s some speculation early Thursday that EU officials could soften their stance on Greek debt relief. The idea that EU creditors should write down their Greek debt holdings in order to bring down the country’s unsustainable debt burden has been floated by the IMF on several occasions recently, although it’s been met with a lukewarm reception from Brussels. Three years ago, eurozone ministers agreed to consider writing down their loans to Greece in order to appease the IMF but never followed up. According to Kathimerini, that agreement could be reiterated next week at the EU Summit. Here’s more (Google translated):

While finance ministers of the Eurozone have gathered in Luxembourg for another Eurogroup, in which the expectations of any progress in the Greek issue is very limited, discussions focus on who and when there could be a further debate which will bring and the solution to the impasse that has been created in recent months.

According to a senior European official said the scenario is considered and the more likely this time is to convene an emergency summit of eurozone members Thursday evening (25.06) after the end of the deliberations of the Summit scheduled on that day and has very heavy agenda. The aim is the Greek issue not overshadow this way the other serious issues to discuss as the Grexit and immigration policy. At the same time it will have spent one week from today's Eurogroup meeting without another thus putting further pressure on the Greek side.

According to him a high-ranking European official, this time from European Commission and European Central Bank edit text that refers to the debt issue in the event of agreement. A re-statement for debt relief won the Greek side of the Eurogroup of November 2012 when he was the Minister C. Stournaras.

More, via Bloomberg:

EU Commission, ECB draft statement on debt relief, which could be used if a deal is reached between Greece, creditors, could be a renewal of Nov. 2012 Eurogroup commitment, Kathimerini reports, citing unidentified EU official.

Euro area finance ministers agreed in Nov. 2012 that “euro area member states will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme”

This would be “in order to ensure that by the end of the IMF programme in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%”

Greek govt has said that country needs something more concrete than Nov. 2012 commitment, which was never implemented even after Greece achieved a primary budget surpluses in 2013, 2014

As discussed last weekend, it's possible that Greek PM Alexis Tsipras could spin a writedown of Greece's debt burden as a concession he extracted from creditors in exchange for a softened stance on pension reform and the VAT, although it isn't yet clear how well that would play with Syriza's Left Platform or with voters. 
Meanwhile, Christine Lagarde is attempting to dispel the idea that she has discretion to grant Greece a grace period after June 30. From Bloomberg:

“I have a deadline, which is 30th of June, when a pyament is due from Greece,” IMF Managing Director Christine Lagarde says at press conference in Luxembourg. “If 1 July it’s not paid, it’s not paid.”

“There is no grace period or 2 months delay as I have heard.”

“It will be in areas, vis-a-vis the IMF. But I hope it’s not the case.”

Despite the rhetoric, it certainly does appear as though Lagarde could avoid triggering accelerated payment rights for other creditors by delaying the delivery of a formal failure to pay notice to the IMF board by 30 days. 
Finally, some asset managers contend the market is understimating the fallout from an escalation in the Greek crisis. Russel Matthews of Bluebay for instance, says ideology and politics may prove difficult to overcome. Indeed, the following comments echoe everything we've said recently about the politicization of the negotiations:

Sovereign markets are still unprepared for the uncertainty and turmoil that is coming in Greece, Bluebay portfolio manager Russel Matthews says in interview.

Divide between Syriza and European policymakers is too large; early expectations of a last-minute deal have been shattered due to danger Syriza poses for euro zone.

European institutions “cannot allow Tsipras to be seen to be successfully breaking the rules of the game”.

“Syriza is an ideologically driven entity” which makes it highly unlikely that deal can be done in time to prevent onset of capital and deposit controls in Greece.

Tsipras’ claim to be working for all Europeans is a “dangerous assertion to make to the political hegemony that has designed the system that governs Europe”.

Had hoped Tsipras would be more pragmatic once he was in power but “increasingly obvious that he sees himself more as an activist hero”; has turned into Chavez rather than Lula.

We'll close with Matthew's grave warning about what comes next:

"Greece domestic situation will be chaos and ungovernable."