Greece Submits New Proposal, IMF Call for Debt "Relief" --Barron's Blog

        By Dimitra DeFotis
        Greece submitted a reform and spending-cut proposal to creditors late Thursday and it will be presented to the Greek Parliament Friday, Bloomberg reports.
        UPDATE: the Greek proposals suggest sales-tax increases and pension overhauls -- starting this month -- that are in line with creditor demands, The Wall Street Journal reports after reviewing the document. One new element: proposed reform of the Greek collective bargaining system. Other proposals include higher value-added taxes on restaurants to a maximum rate of 23% and a phase-out discounted rates for islands, WSJ reports.
        The Global X FTSE Greece 20 ETF ( GREK) closed up 6.5% Thursday, and the fund rallied after the close, while U.S.-traded shares of National Bank of Greece ( NBG) rallied 23% (albeit to $1.07 for U.S.-traded shares.) Emerging markets rallied Thursday, with the Vanguard FTSE Emerging Markets ETF ( VWO) up 2%, with a big turnaround in beleaguered Chinese stocks. The Market Vectors China ETF ( PEK) rose 18.5% Thursday and the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund ( ASHR) jumped 20%.
        The International Monetary Fund lowered its global economic growth forecast to 3.3% Thursday, citing China's slowdown. IMF Chief Economist Olivier Blanchard emphasized the small role the Greek economy, at 2% of Europe's GDP, played in its latest estimate, which is the lowest since the global financial crisis. Blanchard added that Greece should be asked to do less, and the Europeans need to provide more "debt financing and relief," according to an interview aired on Bloomberg Radio.
        So what's next for Greece? Debate into Saturday with the hope of a Sunday deal that will avert a Grexit from the Eurozone. In a note earlier today, Brown Brothers Harriman answered what would hasten a Greek departure from the European Monetary Union:
        "If Greece and its creditors cannot reach an agreement this weekend, the European Central Bank could claw back the Emergency Liquidity Assistance authority granted to the Greek central bank. This would likely force Greece to provide a new means of liquidity. This would become the basis for a new national money. We have suggested two steps that the Greek government may take that would signal a preparation for such an eventuality. First, Greece can make good on its threat to challenge the ECB's ELA authority. ... The other way is to defy the ECB. This would likely require a second measure, and that is to replace the current governor of the central bank with one that would be more accountable to the Syriza-led government. This would also give the government greater control of the country's reserves (gold and hard currency) that become all the more important on a Greek exit."
        And, then there's the slippery slope from IOUs to a new currency. More from BBH:
        (continued, from Brown Brothers Harriman research:)
        "There are some 600,000 government workers in Greece. The government could do what some companies are already reported to have done, and that is to issue scrip, which is a type of private money in lieu of access to public money. A few years ago, the Governor of California issued scrip. In Greece, the value of the scrip would fall relative to the euro. Although the scrip would be viewed as temporary, it could be the basis for a new Greek currency."
        As for issuing a drachma, "there is a hornet's nest of legal issues" that could delay issuance by a month or longer. A new drachma wouldn't get the currency code GRD, which would be confused with the old drachma that is "still alive in cyberspace" due to ongoing payments and contracts.
        Here's Citi's economics team, headed by Willem Buiter:
        "Grexit is now our base case, either via a short-term exit (next few months) or over the next 1-3 years, although it can still be avoided ... short-run Grexit risks have increased sharply since the announcement of the Greek referendum, the emphatic 'No' vote and the imposition of capital controls ... by this Sunday ... the lack of such a deal would lead to scrip currency soon and Grexit thereafter ... while a short-term deal is still likely, this is most likely to be no more than kicking a more than 5-year old can down the road ... even if we get a deal this Sunday (or before 20 July, when a EUR3.5 billion ECB repayment falls due), Grexit is more likely than not for the next 2- to 3-years."
        See the Bloomberg story on the Greek debt proposal, and our posts: " Germany's Schaeuble: Trade Greece For Puerto Rico?" and " What If Grexit Really Happens?"
        (END) Dow Jones Newswires

        July 09, 2015 18:55 ET (22:55 GMT)

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