Waiting for the trojka report and the finale... will the euro go out with a bang...?

The times they are changing amazing.

One year ago in Deauville, we saw Merkel and Sarkozy decide on how to save Europe: getting the banks involved was the answer. Then this week we saw them saving Europe once again: a huge fund and effort was necessary. Everyone was hopeful; it really appeared as if they were going to get it right this time. Stock exchanges felt happy but the stakes are up. Because if Merkozy fail to get it right, the finale will certainly become a blast.

What I find amazing is that we could see a sovereign crisis turn into a full blown bank crisis in Europe, due to the political desire to take revenge on banks. If banks need to pay up as well, this hurts their income, their revenue and future divivends. So down with share prices and trust. Then, add a couple of local bank tax plans on top and those are all the ingredients you need for a full blown contagion in the financial market. Yet only a number of people, among which former Director Hoogduin of the Dutch Central Bank, dare to outline to Merkozy that they themselves have been the major factor that contributed to the feared 'contagion' in the financial markets.

So now we need an ever bigger final bazooka solution. And what concerns me now, is the tone with which both leaders of state keep referring to the trojka report and the decision afterwards. It's a tone that defers the topic to a technicality with subsequent political decision. It's not the tone that you would expect of leaders. Two real political leaders might refer to the report, but not give the trojka this much attention.

Because imagine yourself to be a member of the trojka. If all the eyes of the world are upon you, what are you going to say? You need to keep an optimistic tone, but then again, you can see that the Greek are evidently failing the standards. What to report then? Outlining that Greece missed the norm will mean oil on the fire of populist hardliners in the EU. And stressing that Greece is well underway means that the flak might be directed at the trojka itself. There's no way of doing it right.

So what may happen is that there will be a highly diplomatic press conference and report, so ambigous that it will do the least public harm. Still, the politicans are responsible for putting the trojka in this awkward position. They deflected a primary political issue to a group of experts while they should effectively solve it themselves. Because as things stands now, the trojka has too much politicial expectations deflected upon itself, to do its work properly. And in my opinion, this doesn't bode well at all.

So we could be up for a grand finale. Either because of the trojka report or because of the fact that the French and German are not going to agree on the details that they need to agree upon to shoot the final bazooka.

More and more I feel that this political (and sovereign) crisis has some similarities with these animated Disney films. Cat is chasing mouse. Running hard. Running off the cliff and keeps running in a straight line. Until the cat discovers there's no more ground underneath. Which is when the fall begins. Cat falls down and should be dead of course, but in this miracle world of Disney just irons out the bumps and starts chasing the mouse again....

Updated 1540: If you wish the end result, the joint statement, read the text below: a nice example of diplomacy beyond diplomacy. Greece gets the money while it doesn't fullfill earlier criteria. Where did we hear this before..?

11 October 2011 - Statement by the European Commission, the ECB and IMF on the Fifth Review Mission to Greece

Staff teams from the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) have concluded their fifth review mission to Greece to discuss recent economic developments. The mission has reached staff-level agreement with the authorities on the economic and financial policies needed to bring the government’s economic program back on track.

Regarding the outlook, the recession will be deeper than was anticipated in June and a recovery is now expected only from 2013 onwards. There is no evidence yet of improvement in investor sentiment and the related increase in investments, in part because the reform momentum has not gained the critical mass necessary to begin transforming the investment climate. However, exports are rebounding—albeit from a low base—and a shift towards a more dynamic export sector, supported by a moderation of unit labor costs, should lead to more balanced and sustainable growth over the medium term. Inflation has come down over the last year and is expected to remain below the euro area average in the period ahead.

In the fiscal area, the government has achieved a major reduction in the deficit since the start of the program despite a deep recession. However, the achievement of the fiscal target for 2011 is no longer within reach, partly because of a further drop in GDP, but also because of slippages in the implementation of some of the agreed measures.

As for 2012, the mission believes that the additional measures announced by the government, in combination with a determined implementation of the adjusted Medium-Term Fiscal Strategy, should be sufficient to bring the fiscal program back on track and ensure that the deficit target of EUR 14.9 billion will be met.

Looking to 2013-14, additional measures are likely to be needed to meet program targets. Such measures should be adopted in the context of an update of the Medium-Term Fiscal Strategy by mid-2012. To ensure that the program is growth-friendly, and in view of the ambitious assumptions regarding improvement in revenue administration already embedded in the Medium-Term Fiscal Strategy, it is essential that such measures focus on the expenditure side.

In the area of privatisation, progress has been achieved with the creation of a professionally managed privatisation fund. However, delays in the preparation of the assets for privatisation, and to some extent worse market conditions, mean that revenues in 2011 will be significantly lower than expected. The government remains, however, committed to the revenue target of EUR 35 billion by the end of 2014. Ensuring that the privatisation fund remains independent from political pressures remains key for success in this area.
Banks have improved their capital base through market-based means. As evident from this weekend’s resolution of Proton Bank, the recent amendment of the banking law ensures that non-viable banks can be wound down while protecting depositors' interest and preserving the stability of the financial system.

As to structural reforms, areas of progress include the transport sector, licensing procedures, and regulated professions. As overall progress has been uneven, a reinvigoration of reforms remains the overarching challenge facing the authorities. In this regard, the decision to suspend the mandatory extension of sector-level collective agreements to the firm level is a major step forward, as it will help ensure the flexibility in the labour market needed to boost growth and prevent high unemployment from getting entrenched.

Overall, the authorities continue to make important progress, notably with regard to fiscal consolidation. To ensure a further reduction in the deficit in a socially acceptable manner and to set the stage for a recovery to take hold, it is essential that the authorities put more emphasis on structural reforms in the public sector and the economy more broadly.

The success of the program continues to depend on mobilizing adequate financing from private sector involvement (PSI) and the official sector. Ongoing discussions on PSI together with assurances provided by European leaders at their July 21 summit suggest that the program remains fully financed.

Once the Eurogroup and the IMF’s Executive Board have approved the conclusions of the fifth review, the next tranche of EUR 8 billion (EUR 5.8 billion by the euro area Member States, and EUR 2.2 billion by the IMF) will become available, most likely, in early November.