The Financial Times reported over the weekend that the US has woken up to the risk that the impasse between Syriza and the Troika over the Feb. 28 bailout funds deadline could lead to a disorderly Grexit, which short term would give Mr. Market a sad, and long term has good odds of being the first step in the unraveling of the Eurozone. That would turn Europe’s borderline deflation into a full-blown depression, and seriously impair the US economy, which is moderately integrated into the European economy. For instance, roughly 25% of S&P 500 profits come from Europe.
The overview from the Financial Times:
The US lobbying comes amid mounting concern in Brussels and Washington about the hardline stand taken by some eurozone governments, particularly Germany, that Greece must press on with budget-cutting commitments made under its existing €172bn bailout regardless of last month’s election, which brought anti-austerity party Syriza to power..
US officials are expected to raise their concerns at this week’s meeting of the Group of 20 leading economies’ finance ministers’ gathering in Istanbul and during bilateral meetings in Washington on Monday between US President Barack Obama and Angela Merkel, his German counterpart.
Over the course of the five-year-old eurozone crisis, Mr Obama has intervened with EU officials repeatedly, and sometimes decisively. Many EU officials credit an eleventh-hour call from Mr Obama with convincing Ms Merkel to back the first Greek bailout in May 2010.
But the German chancellor has not always welcomed US pressure, resisting Washington’s lobbying in 2011 and 2012 for a bigger “bazooka” of bailout cash to calm panicking financial markets.
The personal involvement of Obama is a welcome sign of seriousness, and contrasts with the fact that the head of the Treasury team dispatched to Athens, Daleph Singh, looks troublingly young, and his previous experience consists of being an emerging markets trader at Goldman.
But what is far more worrisome is what we hear from a source with knowledge of the Treasury discussions, namely, that they are worried about the run on the Greek banking system. As readers may know, that started with the Syriza win and we suspect was in large measure due to oligarchs voting with their feet. However, the ECB kneecapping of Greece, by effectively ending its access to financial markets, has had the additional effect of re-stoking depositor worries about the banking system, since it called attention to the fact that the backstop, the Emergency Liquidity Assistance program, is subject to reauthorization every two weeks. Now in fairness, the ECB gave a big boost to the amount the Greek central bank could access under the ELA, from €15 billion to €60 billion. I am cynical enough to believe, and plenty of others share my views, that the ECB wanted to keep the bank run going to pressure Greece but have plausible deniability about what they were up to. And the continued impasse has led to a considerable ratchet up in media chatter about Grexit, which is another reason for depositors to take flight.
What is particularly troubling about the word from Treasury is that their concern about the Greek banking system is tantmount to saying that the ECB might withdraw the ELA. This would be catastrophic for Greece, and it would also mean that no depositor in the Eurozone could regard his deposits as safe, since the supposed leader of last resort reneged on that commitment for strictly political ends.
Ambrose Evans-Pritchard confirms this reading. From the Telegraph, emphasis ours:
The EU authorities have told Mr Tsipras that a series of crucial meetings in Brussels this week are his last chance to retreat from hot campaign rhetoric and agree to an extension of the Troika bail-out.
The clear threat is that the European Central Bank will cut off €60bn of emergency liquidity support for the Greek financial system when the existing Troika arrangement expires on February 28. This would force Greece to impose capital controls, nationalize the banks, and reintroduce the drachma within days.
Even if the ECB agrees to a stay of execution, Athens will start to run out of money in March, when it faces repayments to the International Monetary Fund, followed by other creditors. Tax revenues have dried up over recent weeks as Greeks wait to see what Syriza does in office. The treasury’s cash reserves have fallen to €1.5bn.
It is also worth noting that even if Obama gets something of a respite for Greece, it won’t amount to much. Given that the Administration is firmly neoliberal, we suspect they won’t do much to support Greece in its desire to improve wage and employments levels, and will instead push for a mere lessening of the severity of austerity. So rather than the Troika breaking Greece on the rack, its citizens will have to continue to labor in the salt mines.
As we noted yesterday, Bernie Sanders is pressing the Fed to try to talk sense into the ECB, which is a clearly an uphill task.