Things are not going well for Greece. It appears Syriza has largely capitulated to the demands of the Troika. Greece has submitted a request for a loan extension that the Eurogroup will consider Friday. From ekathimerini:
Government officials on Wednesday worked until late finalizing a proposal…
Specifically the government is expected to seek an extension to the so-called Master Financial Assistance Facility Agreement, the official name for the European Financial Stability Facility’s loan contract. That contract stipulates, however, that the dispensation of financial assistance is dependant on Greece honoring the terms of the so-called memorandum, which contains the economic reforms that the previous government committed to and which the current SYRIZA-led coalition has contested. Indeed, former Prime Minister Antonis Samaras had made the same request in December last year when he sought to extend the European part of Greece’s bailout program, from the end of the year to February 28. Kathimerini understands that Samaras’s request had then used the words “technical extension to the existing Master Financial Assistance Facility Agreement,” the same phrase that the new government was said to be considering last night.
The compromise is expected to satisfy both sides as it would mean Athens can avoid using the phrase “extension of the existing program” and the creditors can avoid using the term “loan agreement.” In substance, however, there would be little difference from the extension sought by Samaras as the terms of the memorandum would have to be respected in order for rescue loans to be disbursed.
This means that Greece is effectively asking for an extension of the bailout, which is what it had refused to do. And that means keeping the “conditionality” as in privatizations and labor-crushing structural reforms, intact. Greece is still fighting to keep some flexibility there but it is not clear they will obtain much. Again from ekathimerini:
The European Commission’s vice president for eurozone affairs, Valdis Dombrovskis, said efforts were under way to reach a compromise by finding “common ground for an extension of the current program.”
He insisted that “the best way forward is to extend the existing program with its conditionality.” Dombrovskis noted, however, that if Greece wants to substitute some of the existing measures in the memorandum with alternatives, it could do so.
In other words, this is a “peace with honor” solution.
As we’ve said from the outset, as much as we’d liked to see Greece prevail in its efforts to restructure its relationship with its creditors, not just for its own sake but for the benefit of other periphery countries and the Eurozone project, it was unlikely to prevail unless it could rally support. One possible source was the anti-austerity and anti-Eurozone parties in the rest of Europe. Perhaps we’ve missed it, but we’ve seen nary a sign of Marine Le Pen in France or Spain’s Podemos, the two proximate threats to business as usual in the Eurozone, using the extraordinary hostility of the Eurogroup to economically rational proposals from Greece as a talking point. For instance, when General Secretary Pablo Iglesias of Podemos appeared in New York earlier this week and took questions from the audience, there was nary a mention of Syriza.
Similarly, it will come as no surprise to regular readers to see the Administration hew to its usual pattern of false friend when it appears to take up of populist causes. Consider these remarks, quoted in the Wall Street Journal, early this month:
“You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits,” Mr. Obama said in an interview with CNN’s Fareed Zakaria aired Sunday.
He said Athens needs to restructure its economy to boost its competitiveness, “but it’s very hard to initiate those changes if people’s standards of livings are dropping by 25%. Over time, eventually the political system, the society can’t sustain it.”
And as we pointed out at the time, the Administration had legitimate reason to try to push the recalcitrant Germans and northern countries to relent. The Eurozone is on utterly unsustainable foundations. It isn’t just that its structure is defective, with monetary integration but no Federal fiscal structure to allow for Eurozone-wide government spending to help equilbrate economic performance across regions. It is also that the design of the Eurozone is far too skewed to Germany’s advantage. Germany continues to run large trade surpluses with the rest of the Eurozone; they’ve even widened to a record 7.4% of GDP. Germany wants the impossible, to run persistent trade surpluses with its trade partners, yet not finance their purchases.
Unlike the Eurocrats, the Administration, along with most financial analysts, knows that persisting in this course of action assures a Eurozone breakup. And unlike Germany and its allies in the Eurogroup, it believes that a Grexit would pave the way for other countries leaving, and that the consequences of a Eurozone implosion would be catastrophic for Europe and not too pretty for the US either. So the intervention was hardly selfless. And our sources tell us Treasury did expend some effort on Greece’s behalf, although given the lack of movement from the Eurogroup side over the last week, we doubted how forceful a case was made.
Yesterday, with this terse report on the Treasury’s website, the Administration abandoned its support for Greece:
Readout from a Treasury Spokesperson on Secretary Lew’s Call Today with Greek Finance Minister Yanis Varoufakis
Today, Secretary Jacob J. Lew spoke by phone with Greek Finance Minister Yanis Varoufakis to discuss the latest deliberations between Greece and its international partners. Secretary Lew noted that failure to reach an agreement would lead to immediate hardship in Greece, that the uncertainty is not good for Europe, and that time is of the essence. He urged Greece to find a constructive path forward in partnership with Europe and the IMF to build on the foundation that exists to advance growth and reform. Secretary Lew added that the United States will remain engaged with all parties to encourage concrete progress in the days ahead.
While Ambrose Evans-Pritchard cautioned via e-mail that Treasury could have issued similar warnings to ECB leaders, we see no corresponding press releases. So this looks to be a deliberate retreat from the Administration’s posture that the austerians in Europe needed to relent.
Another source of pressure on Greece was, as we discussed yesterday, was that it was running out of funding even sooner than expected. We had hoped they might hold on until mid-March or later. But ekathimerini reported that the government faced a cash crunch starting February 24. Yes, it can presumably delay some payments or resort to a scrip like the Robert Parenteau’s tax anticipation notes. But the knowledge that Greece was at the end of its rope gave the Troika the opportunity to press its advantage.
A third source of pressure came from the ECB. We were puzzled by the ECB’s decision to give Greece only a €3.3 billion increase in the ELA when it had requested €10 billion. This was clearly not a good sign, although the intent was not clear. Was it to create plausible deniability, as it had two weeks ago, by making it harder for the Greek government to finance itself while maintaining the appearance of supporting its banking system? Many observers saw the measures implemented at the last regular ECB board meeting as intended to accelerate the bank run in progress. If so, the ECB was successful. This looked to be more of the same, to focus media and Greek depositor attention on how little headroom the central bank had provided relative to the continuing deposit drain.
A story in the German paper FAZ (hat tip Dimitri and Swedish Lex) increased the pressure on Greece:
ECB wants Greece to introduce capital controls, reports FAZ this morning, citing unnamed sources
— Live Squawk (@livesquawk) February 19, 2015
The Greek government should have imposed capital controls by now but was loath to do so, since any leak of that line of thought would increase the deposit run. While it could be done in isolation, simply as a protective measure to prevent deposits being moved out of the country and to reduce daily withdrawals. it would be entirely logical to see it as a step on the way to a Grexit. Anyone with an operating brain cell would want to minimize their exposure to having cash in the bank turned into less valuable drachmas.
The ECB did everything they could in the FAZ leak to stoke that concern. The ominous headline is Central Bankers Lose Faith in Greece. Some extracts via Google Translate:
In central bank circles a “Grexit” is now seen as likely. First, there are 3.3 billion euros more emergency loans… Some policymakers speak now behind closed doors the view that a Grexit is the most likely scenario now. “One gets the impression that the Greeks want to get out and look only for an external guilty,” said a central banker, who declined to be named….
In central bank circles was discussed why the Greek government had not yet introduced capital controls. “The Governing Council and the Governing banking supervisors would be better if there were capital controls to prevent bleeding of the banks,” it said in ECB circles. The Council of the Central Bank also discussed the question of whether and how long the Greek banks in general are still solvent. Ela-emergency loans may only be granted to temporarily illiquid but solvent banks in principle. If the Governing Council finish with a two-thirds majority of the Ela loans, this would effectively mean Greece’s euro-Off…
The skepticism in central bank circles increases more and more that the government will agree Tsipras time required by the EU partners extension of the aid program, subject to conditions. “It is very unlikely that the Greeks will make a 180 degree turn,” said a central banker. “It now runs to the Grexit.”
This story is the banking equivalent of yelling fire in a crowded theater. Whoever planted this piece knew exactly what he was doing.
The article also treats the Greek government as likely to repeat its demands of earlier in the week, which were already rejected by the Eurogroup. It also reiterated that the Germans have no intention of budging:
What are the five points, insist on the Berlin and other donor countries? First, this includes the confession that reforms are not turned back. Second, one expects an assurance that new measures are modified in consultation with the three institutions (European Commission, ECB and IMF) – and also the state budget not charge. Thirdly, to predict, to repay the loans to all donors to the Greek. Fourth part to the fact that Athens agreed to continue with the three institutions that have been called “troika” to work. Fifth, it is expected that the new Greek government seriously committed to the goal of successfully guiding the program to end…
The CSU profiled on Wednesday with Euro critical tones. Your Honorary Chairman Edmund Stoiber used the political Ash Wednesday to sharp attacks on the behavior of the government in Athens to their donors. “How many steps can you give the cow that you will milk,” warned Stoiber. The behavior Athens towards the countries of the Euro Group is an outrage. “The Germans are very helpful and patient, but I do not know how long,” Stoiber said. Europe is a continent of law and live on it that contracts are honored. If the principle of “pacta sunt servanda” (agreements must be complied with) no longer applies, “Europe is at the end.”
Another proof of the German view that Greece is a vassal state: Germany formally demanded the removal of Varoufakis through their ambassador in Athens.
The irony here is that if Greece were willing to default, Germany would have turned an intended subjugation of Syriza into a devastating political wound to the ruling German parties. Refusing to extend the ELA any further, if it were to come to that, merely limits ECB losses. If Greece were to default, it would suddenly expose the size of the commitments to Greece through the Target2 system, the vehicle used to launder the bailout money from Greece to French and German banks. Most Germans have the inaccurate picture than the rescue funds went to stereotypically lazy Greeks, when 91% of the payments actually went to banks.
As Ambrose Evans-Pritchard explains in an important article:
The Target2 claims of the Bundesbank on the ECB system have jumped from €443bn in July to €515bn as of January 31. Most of this is due to capital outflows from Greek banks into German banks, either through direct transfers or indirectly through Switzerland, Cyprus and Britain.
Grexit would detonate the system. “The risks would suddenly become a reality and create a political storm in Germany,” said Eric Dor, from the IESEG business school in Lille. “That is the moment when the Bundestag would start to question the whole project of the euro. The risks are huge,” he said.
Mr Dor says a Greek default would reach €287bn if all forms of debt are included: Target2, ECB’s holdings of Greek bonds, bilateral loans and loans from the bail-out fund (EFSF)…
As a practical matter, the ECB itself would be in trouble. Any Target2 losses must be shared, according to the ECB’s “capital key”. The Bundesbank would take 27pc, the French 20pc, the Italians 18pc and so on, but these are uncharted waters.
“I do not believe that the Germans would allow the Bundesbank or the ECB to carry on with negative capital. They would demand recapitalisation and consider it a direct loss to the German state,” said Mr Dor.
If so, Chancellor Merkel would face an ugly moment – avoided until now – of having to go to the Bundestag to request actual money to cover the damage. Other forms of spending would have to be cut to meet budget targets.
Evans-Pritchard judged Greece to have the far stronger hand by virtue of being able to inflict this level of damage on Merkel. Yet the persistent ECB bludgeoning of Greek banks appears to have chastened Tsipras and Varoufakis.
Or it may be that even the concessions that they are apparently prepared to offer will not be deemed sufficient. For instance, it does not appear that Syriza has agreed to let the Troika monitors back in, one of the five demand seen as critical by the Germans. And even though the European Commission spokesperson Valdis Dombrovskis said there might be some negotiating room on specific conditions, that is also inconsistent with the FAZ description of the German stance. Recall that it was a European Commission trial document that Varoufakis said Greece was willing to sign but was firmly nixed by the Eurogroup.
So it may be that this last round of concessions is meant not as a capitulation but to demonstrate how much Greece was willing to give in the face of implacable Eurogroup demands and was still rebuffed. We’ll know the outcome either way shortly.
Update 8:00 AM. Well, that was fast and ugly. The Germans are playing completely non-negotiable, not that that is a surprise. Greece must surrender completely. From the BBC:
Germany has rejected a Greek request for a six-month extension to its eurozone loan programme, after earlier signs that a compromise was possible.
Greek had sought a six-month assistance package, rather than a renewal of the existing deal which comes with tough austerity conditions.
But German Finance Minister Wolfgang Schaeuble said it was “not a substantial proposal for a solution”.
The European Commission had earlier called the Greek request “positive”.
The wee problem is that the European Commission is not a party to this negotiation. Back to the key sections of the article:
Mr Schaeuble said the Greek request was an attempt at “bridge financing, without meeting the requirements of the programme. The letter does not meet the criteria agreed upon in the eurogroup on Monday”….
And it has this useful, if disheartening, summary:
How the German papers see the Greek negotiations:
Popular tabloid Bild has a full page spread featuring pictures of Vladimir Putin and Alexis Tsipras with the headline: “The Russian or the Greek: who is more dangerous for us?” Underneath it says: “Europe is in the most difficult crisis it’s seen for decades — because two heads of government are aggressively demonstrating their power.”
A commentary in Frankfurter Allgemeine Zeitung says: “The Greek government appears to believe it can treat its partners like fools,” accusing the Greek government of using Brussels like a stage for theatrics, adding that many people have simply had enough.
And the business paper Handelsblatt says the request for a loan extension changes very little. “It remains unclear whether Athens is willing to meet the conditions set by its creditors.” And that, the paper says is crucial for the meeting of European finance ministers on Friday.
Update 8:55 AM More detail from the Financial Times. Notice they confirm our reading of the Greek offer:
Germany has rejected a request by Athens to extend its €172bn bailout despite a significant U-turn by the new Greek government, which for the first time on Thursday promised to work on completing the economic reform measures required by the current rescue programme.
Martin Jäger, a spokesman for Germany’s finance ministry, said the letter requesting the extension, sent by Greek finance minister Yanis Varoufakis on Thursday, left too many questions unanswered and did not meet demands by eurozone finance ministers to unconditionally agree the terms of the existing rescue.
“The letter from Athens is not a substantive proposal for a solution,” Mr Jäger said. “In truth, it aims at bridge financing without fulfilling the demands of the programme. The text does not meet the conditions agreed on Monday in the eurogroup.”
The swift rejection by Berlin after what many viewed as near complete capitulation by Athens is just the latest in a series of breakdowns over how to keep the Greek government financed when the current EU programme expires next week….
Some members of the governing council believe that if a solution is not agreed between Greek officials and the eurogroup by the end of the week, the ECB might then have to review the solvency of Greek banks. The approval of the latest increase lasts for two weeks, but ELA can be reviewed at any time. A two-thirds majority of the governing council’s 21 voting members would be needed to end ELA — a “nuclear option” that would effectively force Greece to adopt capital controls or quit the currency area.
Update 11:45 AM: For a good recap of events and reactions, see the Telegraph live blog. Short version: an emergency Eurogroup meeting is on for 3:00 PM in Brussels tomorrow. If this take is right, it’s going to be a stormy session:
#Greece govt says Eurogroup now has two choices: either to approve or reject the Gr request
— Efthimia Efthimiou (@EfiEfthimiou) February 19, 2015
One small bit of good news: The Telegraph live blog says the ECB denied the FAZ rumor that the ECB was ready to recommend capital controls for Greece.