New risk Emerge. Leviathan. Turkey Israel Cyprus

·            Papandreou cancels trip to NY

·            Conference today at 17:00 (London time). New measures to be announced

·            Coupon Payment delay unlikely.

·            Elections?

·            Leviathan

Papandreou cancels UN trip

The Greek saga continuous and it is better than watching Joan Collins in Dynasty. In a theatrical and dramatic gesture the Greek PM swapped, UN cocktail parties, Bloomingdale sales and a meeting with Turkish PM Mr Erdogan for Mr Venizelos. The official reason given is that Mr Venizelos encountered a hostile reception (putting it in polite terms) by his European colleagues who did not believe that his latest Taliban Tax raid on housing was going to work. The European leaders were also possibly annoyed by the support of the Americans and especially by Mr Geithner who urged the Europeans to stop bickering about the debt and get on with the job of dealing with it. Judging from the recent, last hour debt ceiling deal in the US, which brought the US within days of defaulting most Europeans would be sceptical of his wisdom.

New Measures

Greek government target is to:

·            Comply with the 2011 budget as dictated by Troika

·            Achieve primary surplus in the 1H of 2012

Both targets are ambitious. In order to be within the 2011 budget, as time is running out, further tax raids may be on the cards.

The latest measures to be announced today will come after Mr Venizelos gets the OK from the creditors of Greece at 17:00 (London time). These may include firing up to 100k of public sector workers and abolishing many state enterprises. This time however, promises will not be enough, only immediate and swift action will be accepted by the creditors of Greece. The EU can afford to be hard with the Greeks as there are NO significant Bond payments till December and the government would run out of cash for pensions and salaries. In fact, this may be an indirect way to say to Mr Papandreou to head for the exit as an internal default would end his administration.

The truth is, that out of all the Troika recommendations and all that was agreed in the memorandum of understanding signed by Mr Papandreou, the Greek government chose to implement the tax raids and left the structural changes for later. It did not reduce the huge public sector and it was revealed recently that they hired 24k more public workers, contrary to what was agreed and promised. The problem is that very little was done in improving tax compliance, administration and cross checking or what was done will take time to pay off any dividends.

Unfortunately for the Greek government, tax raids have diminishing returns. They are inherently unfair as they tax only those who already pay taxes (salaried workers) and not the ones who have avoided them consistently. They also increase resistance, civil disobedience and schizophrenia as the Greeks struggle to comprehend what is going on.

Reducing the public sector is like asking the PASOK party to commit (assisted by the Troika) suicide. In the past 30years the two major political parties (PASOK and ND) based their vote appeal by beefing up the state sector. Among other things, they used it for votes or as a means to reduce the unemployment caused by the loss of competitiveness of the Greek economy. Controlling the EU subsidies also gave them the extra vote-buying power bonus. Lets not forget that Mr Papandreou came into power on a “spend more” electoral platform as it promised the Greek people that he has found more money to be spent.  

Coupon Payment

There are no significant redemptions till December but there are a couple of coupons totalling 770mln falling tomorrow (Maturities 2040 and 2036). Greece does have the money to pay these coupons and there should be no problem. However, missing a coupon is not an immediate Event of Default. This is because, a grace period is allowed, sometimes up to a month, for the issuer to make good on the payment.

Could the Greeks play this hand in order to scare the markets and the EU? We think not as this would betray some kind of a plan from the Greek side and it should be clear by now that they do not have any plans. Furthermore, it is a highly risk strategy as it would anger the EU and their public even more. Thus, this option is totally out of reality.

Elections?

Conventional wisdom has it that an election today would be disastrous for Greece right now. According to the polls both parties score very low and the problem is that there are no credible alternatives in sight. The leading opposition party (ND) seems to believe in financial miracles and their economic team of firefighters measures up in incompetence with the PASOK team. On the other hand, an election may be a way to let off steam. As there would be no clear winner a coalition government may be the best and most legitimate way to pass all the changes dictated by logic and Troika. If the Europeans have lost confidence in Mr Papandreou then we may have elections sooner than the 2013.

Leviathan

Watch out for Leviathan. No, not the biblical sea monster, but the largest natural gas find the past 10 years. It may be the next big story in the region with possible Greek-Cyprus-Turkey-Israel-ME financial and geopolitical implications. In December 2010, Israel announced the discovery of a large natural gas field off the coast of Israel and south of Cyprus. Incidentally, this may be the reason why Russia came up with 2.5bln aid for Cyprus when the EU was still arguing. The find would make Israel independent of any gas from Egypt (hence their muted reaction to the blowing up of the pipe recently) and in fact energy independent for many decades. This significantly changes the dynamics of the region. The find is so big that it could supply Europe with natural gas and free some of the dependency with Russia. Why is it relevant to Greece you may ask? Firstly, any pipe would pass through Greek waters that are disputed by Turkey and secondly, Cyprus which delimited and agreed their Exclusive Economic Zone (EEZ) with Israel is still a divided island with 40% occupied by Turkey. So Turkey is asking for a piece of the energy pie. As they have little or no hope in getting anything through the legal channels they are trying to bully their way in. Bulling Israel is not a clever idea as they have 450 third generation fighters but Cyprus is an easy target.

Drilling is to start this week and Turkey has threatened action to stop it. In addition, Turkey has started explorations using a Norwegian ship in waters that Greece claims its own.

A dispute with Turkey is the last thing that Greece needs right now, but one cannot help but point that any escalation may be of benefit to the beleaguered Greek government in uniting the people behind them. Thus the sudden return of the Greek PM and the cancelation of the meeting with Mr Erdogan in the UN may have an alternative reading.