On to the next cliffhanger

The Greek government is expected to hand in the final list of reforms this morning, to be discussed by the Eurogroup this afternoon; earlier drafts were rejected as inconsistent with previous agreements; according to Kathimerini the measures include a crackdown on tax evasion and corruption and eventually a reference to privatisations and fuel smuggling; the proposal retains the €1.9bn spending on social measures, as well as measures to help taxpayers pay their debt and tackle nonperforming loans; Dimitris Mardas said in an interview he expects €1.5bn from fuel smuggling and a 20% cut in procurement costs with unified system; Panagiotis Lafazanis said he does not want to see the agreement to cancel Syriza's programme; behind him are 30 left wingers in Syriza, who so far refrained from open revolt; the FAZ says fighting tax evasion is unlikely to yield high tax revenues; this is, though, only the beginning of a long and difficult negotation, even if the Eurogroup signs off to extension the MFAF agreement; Further News Paul Mason says the price of an agreement today will be an increase in political support within Syriza for Grexit - what he calls a "friendly default and exit strategy"; he also says the price of Germany's imposition of its will on others will go beyond Greece - it will not go unnoticed in the UK debate on future EU membership; in this context we noted an interesting article by Yanis Varoufakis from a year ago, in which he advocates a bitcoin-like construction as a parallel currency for stricken southern European countries; Bloomberg writes that Luis de Guindos was harder on Greece than Schäuble at Friday's Eurogroup; Italy and Switzerland sign a tax deal, another nail in the coffin for bank secrecy in Europe; Dominic Elliot argues that the capital markets union project needs stronger incentives for equity investment and a cross-border insolvency regime; Juan Carlos Barba argues that Spanish firms are losing export competitiveness because their limiting factor is not labour costs, addressed by reforms, but investment which has suffered in the crisis; Francesco Papadia, meanwhile, wonders whether the ECB can do more than just QE - and discusses a derivative-based strategy as part of which the ECB issues swaps to insure counter-parties against undershooting inflation.

The Greek government is expected to submit the final list of reforms this morning after several drafts have been exchanged with the European Institutions yesterday. Dpa reports that the delay was due to a rejection of earlier drafts as insufficient and not consistent with previous agreements. Eurogroup finance ministers are scheduled to discuss the proposal this afternoon via teleconference. According to Kathimerini, the Greek proposals include a crackdown on tax evasion and corruption and social measures. The FT reportsthat the proposal will retain the government’s election promise to spend €1.9bn on social services for the poor and other relief measures for taxpayers facing big fines for unpaid taxes and borrowers facing foreclosures. Revenues would be raised through more progressive taxes and a crackdown against tax fraud and fuel and tobacco smuggling. Kathimerini writes that the list of measures to be submitted by the new Greek government will not contain a cost-benefit analysis, to help creditors assess the potential impact on the budget. The letter is rather likely to set out the broad policy proposals and express the government’s commitment to a much-delayed crackdown on tax evasion. This morning there are thus no more details on the list, but some other cabinet minister announcements related to this. In an interview with Kathimerini (via Macropolis) Alternate Finance Minister Dimitris Mardas outlined the three priorities to help cover funding but also support the fiscal consolidation both in the short- and medium-term. These mainly involve a new framework to reduce excess costs related to public procurements, tackling fuel smuggling and restructuring the Financial Crimes Squad (SDOE). Mardas expects to cut by up to 25% the procurement costs by using a unique system. The usage is to be binding not only for state entities but also for those receiving state guarantees or subsidies. Greece has procurement costs of about 15% of GDP according to EU estimates. Mardas also expects €1.5bn more income as of next year from tackling oil smuggling through GPS systems on oil tankers and an inflow-outflow system at refineries. Energy Minister Panagiotis Lafazanis, who represents the left faction of Syriza, expressed his view that the agreement should not cancel the anti-austerity and Syriza's programme, according to Greek Reporter. In an interview with newspapers he also said that Public Power Corporation, Hellenic Transmission System Operator and Public Gas Corporation (DEPA) will not be privatised as envisaged under the old agreement, but that there is no privatization concern for Piraeus Port Authority, Thessaloniki Port Authority, and the Greek railways.  The concern for the left faction is that there is no attempt by Athens to include any of Syriza’s pre-election pledges such as changing the payment plan for unpaid taxes, increasing the minimum wage and freezing foreclosures for primary residences, writes Macropolis. Veteran MEP Manolis Glezos' statement, apologising to the Greek people that he had been wrong to believe that Syriza was to live up to its pledges (Macropolis posted the translated version of his appeal) might ring true to the left faction of Syriza with its 30 lawmakers. Though there are no signs of rebellion yet, the list of reforms will certainly be the subject of discontent. It will depend on how invasive the institutions are perceived to be and will require some extraordinary political skills from Alexis Tsipras to keep the different factions together. German newspapers on the other hand are sceptical that Greece can deliver on its reform pledges, fighting tax evasion in particular. TheFAZ writes that there are the usual suspects targeted for tax evasion, but it is unlikely that they will result in significantly more tax revenues. Shipowners have their parent companies registered outside Greece and there are simply too many independents, about one million, to threaten credibly with stricter controls of their income tax declarations. Large companies can relocate outside Greece, so the Syriza government will have no choice but to tax the middle income earner, who supported Syriza in the last election, like previous governents did. In the end, even if the reform list and the extension are accepted this is only the beginning of a long and uncertain process of negotiations with the institutions and creditors over the next four months. The Greek government will have to find the money to bridge its funding needs until April, assuming the review is concluded by then and the bailout funds released. The Greek government will have to implement the agreed reforms without delay and survive the excruciating exchange with the institutions. There has to be negotiations about the follow-up on a new bailout programme and debt relief, as well as the political conditions attached to this. We may have an agreement on the extension at the eurogroup level but this is only buying time for finding a compromise on a much more fundamental gap in expectations. Is Syriza turning in favour of Grexit? Paul Mason is one of the few TV journalists with meaningful contributions to our subject. He has a rather bleak assessment of the political impact of last Friday's agreement and today's follow-on deal. He notes: "However, there is a sea change going on within Syriza. In the past 48 hours I’ve heard people who were staunch believers in the “good euro” – a euro that can accommodate by negotiation a radical left government – say, effectively, they were wrong. I would expect the cost of a non-rebellion by left MPs in Syriza to be a rapid and overt move towards a 'friendly default and exit' strategy. The “New Drachma” notes circulated as spoofs three weeks ago look more and more like becoming reality – though as with all economic shocks, it may take weeks for ordinary people to understand what is happening." He makes the wider point that Germany's Authoritarian imposition of its policies will also resonate with the British electorate. What Germany did to Greece on Friday can be done to any country: obey or leave. And it can apply not just to the eurozone but to the European Union itself, or to the Schengen and Dublin Treaties on migration, or to Court of Human Rights. When he talks about friendly exit, what form could this take? This question has been answered by none other than Yanis Varoufakishimself - albeit long before he became finance minister. The answer is a modified version of Bitcoin. He wrote a series of articles on the subject. This one is one of the best articles ever written on the economics of Bitcoin and its economic pitfalls, in which he argues that Bitcoin is unsuitable for a real economy because, by design, it is deflationary. But it has potentially useful applications for the eurozone. A modified version of a bitcoin could be used as a parallel currency. So any reader who wants to know about a Greek plan B, this is the stuff he has been working on before. "Is there something that the peripheral countries can do to give themselves a chance to breathe better and to act as a bargaining chip that will make Berlin, Frankfurt and Brussels take notice? The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes. FT-coin could work as follows: You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website (Spain, Italy, Ireland etc. would run their separate FT-coin markets) under a contract that binds the national Treasury: (a) to redeem your FT-coin for €1000 at any time or (b) to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes. Each FT-coin is time stamped i.e. in its code the date of issue is contained and can be used to check that it is not used to extinguish taxes before two years have passed." Guindos even tougher than Schauble? Bloomberg has the story that Luis de Guindos was even harder on Greece than Wolfgang Schäuble. For instance, the Eurogroup rejected Schäuble's insistence on a further eurogroup meeting Tuesday, but then de Guindos pressed for a teleconference which was agreed. It is also claimed that de Guindos lectured Varoufakis on the need to earn the trust of the rest of the ministers and learn how European diplomacy is conducted. In addition to concern about Syriza as a proxy for Podemos, it is generally assumed that de Guindos is motivated by his wish to succeed Jeroen Dijsselbloem as eurogroup chairman, and is scoring points by being the toughest of the tough. The Italian Swiss Tax deal We read in the Wall Street Journal that Pier Carlo Padoan has budgeted only a single euro for the tax windfall he may receive as a result of a tax agreement between Italy and Switzerland, which effectively ends bank secrecy. Matteo Renzi was less modest than his finance minister, tweeting that he expects to see "billions of euros returning to the State". The agreement comes with an amnesty clause under which Italians who repatriated undeclared income back to Italy would have to pay back taxes of only 5 years - as opposed to 10 years under the country's most recent tax amnesty law. The agreement also introduces new rules for the taxation of cross-border workers. It still needs ratification in Italy and Switzerland - the latter through referendum, as Corriere della Sera notes in its coverage. On the capital markets union In a Breaking views comment about capital markets union, Dominic Elliot writes that what Jonathan Hill would need to work on to really encourage non-bank financing is a cross-border insolvency regime and tax incentives for investors willing to contribute equity to SMEs. Allowing banks to sell off equity tranches of securitizations will also draw more investor attention due to the higher yields, and free bank capital for further lending, argues Elliot. Until such reforms are included, he says, the capital markets union will only be a slogan. Spanish exports In his El Confidencial blog, Juan Carlos Barba writes that as a result of the crisis Spain has become less and not more export-competitive. This is because the limiting factor for Spanish exporting firms is not wages but investment, without which they quickly fall behind. Thus, the labour market reforms have had a marginal effect on competitiveness, but the depressed investment climate for several years is beginning to have an impact on export performance visible already in the end of 2014 data. The data Barba uses are relative production prices between Spain and Germany which have been essentially level for over 15 years, a period during which Spanish exports grew at a rate "comparable to that of Germany" apart from a poor 2014. Barba concludes that the budding recovery of GDP and employment is due to credit-fuelled consumption which in addition has tipped the trade balance back into deficit. As the starting position is one of high indebtedness, Barba warns that a new private debt crisis might come again relatively early. How about an inflation swap issued by a central bank? Francesco Papadia wonders what else the ECB can do to bring inflationary expectations back to target. He noted that not only have inflationary expectations drifted downward, they have not much come up since the start of QE. He is considering the virtues of what is called a derivative based monetary policy, where the central bank uses the derivative markets. This is how it would work: "The basic idea is that the European Central Bank could offer an option in which it would pay to counterparties in the contract a certain amount of money if the inflation rate was, over a certain period, lower than a certain level, constituting the strike price of the option. Alternatively, or may be in addition, the European Central Bank could intervene in the inflation swap market, offering a fixed rate of inflation against a floating inflation. Purchasers of the option or counterparties in the swap would make money if the rate of inflation was lower than, say, the ECB objective of 2.00 per cent over a certain period, corresponding to the “medium term” in the inflation objective. This should raise inflation prospects through a number of channels." In his post he goes through the various channels through which this policy could work. One of the obstacles is the lack of precedent. Nobody knows what quantity of contracts is needed to impact inflationary expectations. The ECB would need to experiment. Of course, once the ECB starts playing the inflation swap market it can no longer use the 5y-5y forward inflation swap as a benchmark for inflation expectations, which always looked like a desperate excuse for delaying QE anyway. Eurozone financial data 10y spreads Previous day Yesterday This Morning France 0.251 0.229 0.232 Italy 1.202 1.123 1.124 Spain 1.129 1.052 1.058 Portugal 1.862 1.791 1.851 Greece 9.782 9.785 9.81 Ireland 0.745 0.707 0.708 Belgium 0.288 0.265 0.268 Bund Yield 0.37 0.367 0.366 exchange rates Previous This morning Dollar 1.133 1.1334 Yen 135.110 135.1 Pound 0.737 0.7332 Swiss Franc 1.074 1.0761 ZC Inflation Swaps previous last close 1 yr -0.25 -0.25 2 yr 0.14065 0.14065 5 yr 0.705 0.705 10 yr 1.14 1.14 Eonia 20-Feb-15 -0.04 19-Feb-15 -0.03 18-Feb-15 -0.04 17-Feb-15 -0.04 OIS yield curve 1W 0.034 15M -0.102 2W 0.010 18M -0.108 3W 0.003 21M -0.106 1M 0.012 2Y -0.107 2M -0.009 3Y -0.078 3M -0.020 4Y -0.031 4M -0.050 5Y 0.035 5M -0.065 6Y 0.115 6M -0.064 7Y 0.204 7M -0.069 8Y 0.292 8M -0.073 9Y 0.376 9M -0.080 10Y 0.456 10M -0.084 15Y 0.754 11M -0.072 20Y 0.933 1Y -0.095 30Y 1.098 Euribor-OIS Spread previous last close 1 Week -5.457 -5.757 1 Month -2.286 -1.986 3 Months 4.529 4.429 1 Year 30.186 31.286 Source: Reuters To unsubscribe click here