Yesterday, we worked through a scenario in which it might be possible for Greece to improve the very long odds against it making real headway in its negotiations with the Troika. That possibility, as we stressed, depended on Greece having access to enough funds to be able to last without external support through at least the end of March, and better yet into April, when election results in Spain and France could apply pressure to governments that are now opposed to Syriza and shift the negotiating dynamics.
That optimistic possibility now looks hopeless. Syriza is finding its options narrowing dramatically. And as we will discuss shortly, a Grexit is not something the government wants or is seeking, and for good reason. But the short-sighted pounding of Greece will if nothing else play into the hands of Marine Le Pen, the rabidly anti-Eurozone leader of Front National. A Le Pen victory in the French presidential elections of 2017 would mean a rapid departure by France, an almost certain fatal blow to the Eurozone project. So even if a victory over Syriza winds up looking decisive, it is likely to prove to be Pyrrhic.
As most readers know by now, Greek prime minister Alexis Tsipras made a bold speech to Parliament on Sunday, reaffirming his commitment to obtaining relief from austerity. That elicited a harsh response from Angela Merkel and Wolfgang Schäuble. As the pink paper put it, “Together, the remarks amounted to a German rebuttal to Mr Tsipras’ defiant pledge on Sunday night to end the bailout.” In other words, the Greek government is being told, in no uncertain terms, that it will not be permitted to renegotiate the terms of its existing deal, which includes items it has already firmly rejected, such as moving forward on new privatization deals, and replacing reforms designed to squeeze workers with ones to improve domestic labor demand and wage rates.
Yet Syriza is acting as if it is still not getting the message. Finance minister Yanis Varoufakis made some preliminary remarks about the package Greece is tabling this Wednesday, and remarked that Greece was accepting 70% of the existing structural reforms (see the video). But the idea that Greece thinks it can repudiate any of the commitments made in older bailouts, no matter how unsound they are, is anathema to the “a deal is a deal” German thinking. And Eurozone officials are also keenly aware that allowing Greece to get waivers will lead to similar demands from other borrowers, as a rapid rebuff of a request from Ireland demonstrated.
But there is mounting evidence that Greece has limited staying power and cannot pay its bills much into March absent a lifeline from the Troika. For instance, a Finance Ministry official leaked that Greece would be asking for bridge loans through September, when Tsipras has said a day before that they wanted them only through June. Asking for more time is tantamount to asking more more money, and is a sign of weakness. Now perhaps this source was departing from the hymnal, but this request would be seen by Syriza’s already bloodthirsty counterparties that they have the upper hand, and should press their advantage.
And there is even more telling evidence that Greece lacks the financial staying power to hold out long enough to move the political dynamic in Europe. From ekathimerini:
Greece could turn to “another source” for funding in the event that a deal is not reached with its eurozone partners and Berlin in particular, Defense Minister Panos Kammenos said on Monday night, adding that the government – in which his party is the junior partner – has an “obligation to go to Plan B.”
Speaking on Mega television, the head of Independent Greeks indicatively said Greece could seek funding from “the United States at best” or even China or Russia in the event that talks in Europe reach a dead end. He added that this could take the form of concessions for major infrastructure like ports, in which Moscow has expressed an interest.
“What we want is a deal,” stressed Kammenos. “But if there is no deal and if we see that Germany remains unbending and wants to blow Europe apart, then we have the obligation to go to Plan B. Plan B is to get funding from another source.”
Now, again, Kammenos has spoken out of school before; he expressed an intent of cozying up to Russia and had to walk that back by saying that Greece intended to maintain ties with both Russia and the EU. But his remarks confirm that Greece needs the bridge financing, and by implication, sooner rather than later. And he unwittingly makes it clear how dire the situation is, since none of his funding sources are realistic options.
Final evidence comes from Ambrose Evans-Pritchard of the Telegraph:
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….
Greek lenders are under serious stress. The ECB’s shock decision last week to stop letting them use Greek bonds and Greek-guaranteed debt as collateral for loans has forced them to take on emergency liquidity that is more costly. It also imposes greater “haircuts”, effectively contracting of credit.
This comes at time when non-performing loans are already the highest in the world at over 40pc and still rising. Greek property prices fell a further 5pc in the fourth quarter of 2014, pushing large numbers of mortgage holders yet deeper into negative equity. Data released today showed that Greece’s industrial output fell 3.8pc in December.
Evans-Pritchard’s assessment is that Syriza is willing to play an extreme form of a game of chicken because the costs to the Eurozone will be high if Greece is forced out. He like many observers believe that once the Rubicon of defining exit mechanisms is crossed, other exits are inevitable. The idea that a Grexit will be contained, even if it is “contained” in the immediate sense of limited immediate financial contagion, will prove to be illusory as the spring 2007 delusion that the subprime criss would be contained.
And let me again stress that Varoufakis sincerely believes that a Grexit would be a disaster for Greece. The idea that Syriza is executing a nefarious plan to produce a Grexit while looking blameless to Greek voters is implausible. The damage to the Greek economy, not just short term but longer-term, would almost assure Syriza’s ouster and pave the way for big gains by the Nazi party Golden Dawn. This is what Varoufakis wrote in 2012 on why a Grexit was a terrible idea (emphasis original):
Because of two important reasons. First, because of the crushing delay in introducing a new currency. Secondly, because of what I call the bifurcation between the stock of savings and the flow of incomes. But let me take these one at a time.
Delay: Bank of Greece colleagues tell me that it will take months before ATMs are stocked with new drachmas once they get the go ahead to print them. Even if it takes weeks, an economy cannot remain un-monetised for so long, especially when already on the canvass of a deep crisis, without major civil unrest and an almost terminal effect on economic activity.
Bifurcation: Even ignoring the crippling effects of the delay, we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes). This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and the flow of incomes and pensions (once the banks re-open) will be in drachmas. So, unlike in Argentina, a Greek euro-exit will drive a wedge between stocks and flows, savings and incomes; with the former revaluing massively relative to the latter. Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous (something that did not happen in Argentina since most savings were in pesos also).
In short, even if we neglect the devastation caused by the delay in the introduction of the new currency (something Argentina did not have to worry about), the new currency will be debased ever so quickly due to this bifurcation, leading to hyperinflation and the loss of most of the competitive gains we might have hoped for from the devaluation.
3rd difference: Greece is perfectly capable of poisoning the water it is swimming in (Europe)
When Argentina defaulted and broke the peg, the ill effects on its trading partners (China, Brazil etc.), as well as on the broader macro-economy in which it was functioning, were negligible. If Greece leaves the euro, however, the results will most certainly prove catastrophic for our ‘economic ecology’, and in a never-ending circle of negative feedback, will bite our struggling nation back.
To begin with, Greece must exit not only the Eurozone but also the European Union. This is non-negotiable and unavoidable. For if the Greek state is effectively to confiscate the few euros a citizen has in her bank account and turn them into drachmas of diminishing value, she will be able to take the Greek government to the European Courts and win outright. Additionally, the Greek state will have to introduce border and capital controls to prevent the export of its citizens euro-savings. Thus, Greece will have to get out of the European Union.
Setting aside the domestic ramifications over loss of agricultural subsidies, structural funds and possibly trade (following the possible introduction of trade barriers between Greece and the EU), the effects on the rest of the Eurozone will also be cataclysmic. Spain, already in a black hole, will see its GDP shrink by more than Greece’s current deflationary record rate, interest rate spreads will tend to 20% in Ireland and in Italy and, before long, Germany will decide to call it a day, bailing itself out (in unison with other surplus countries). This chain of events will cause a bitter recession in the surplus countries clustered around Germany, whose currency will appreciate through the roof, while the rest of Europe will sink into the mire of stagflation.
How good will this environment be for Greece? I submit it to you, dear reader, that the answer is: Not good at all!
Now Greece might manage a “dirty exit” from the bailout and fly naked after the deadline of February 28. And it might manage to eke out more from its dwindling fiscal resources via using tax anticipation notes for some internal expenditures. But its request for bailout money and the leaks and statements around it strongly suggest that Greece can’t last for a couple of months, which is what it would need to begin to make political inroads and dent the image of Troika invulnerability. And as we also discussed, there is the not-trivial possibility that the ECB would terminate the now-critically important banking system backstop, the ELA, or impose conditions that would box in Greece. So the ECB has yet another powerful weapon that it has yet to deploy.
As we indicated in our companion post on Greece today, Treasury is in discussion with Eurozone officials to try to get them to soften their position. Even though the popular perception is that Germany is the impediment to a deal with Greece, the reality is much worse.
Informed sources tell us that Obama and Treasury are looking to Germany to moderate the positions of even more recalcitrant members of the Eurozone. All of the right wing (or at best) center right governments in the periphery countries that knuckled under to austerity see allowing Syriza to score any success as tantamount to signing their own political death warrants. They are even harder line than the Germans on the need to force Greece to stick with the current bailout terms (which included labor-crushing structural reforms) and are less willing to give Greece a break on debt restructuring and a lowering of the level of the fiscal surplus required (note that most financial types were sanguine that a deal was possible on these elements, but they appear not to recognize how inflexible the positions of both sides are). And the most extreme government is that of Finland. Recall that Finland is the one that boxed in Greece even before Syriza was elected. Finland threatened to veto all the other Eurozone members on their plan to extend the current bailout till June to allow for the formation of a coalition and allow the new government time to settle in. The much shorter February 28 deadline was needed to secure Finnish cooperation.
Reader Swedish Lex points out that the request for additional time by Varoufakis might be a reflection of a need to work around the Finns. Via e-mail:
Each Member State decides unilaterally which EU decisions have to go through parliament and which can be agreed by Ministers (or lower level civil servants as the case may be). Sometimes Member States’ constitutions force politicians to run EU decisions through Parliament. Sometimes politicians prefer to do so for domestic political reasons. I do not know what the national Finnish rules are on the issue but my assumption is that any substantial amendments to the Greek bailout must be run through Parliament. EU politicians therefore always tell their EU partners in negotiations that “I can agree to this but I will never be able to get it through Parliament”
Smaller Member States can identify with Greece in terms of size and economic hardship in recent years. These other states have been bullied by Germany (and France when under Sarkozy) in recent years and have, for the most part, stoically (and stupidly) carried on.
Only natural then that they are really eager not to grant any “unwarranted” benefits to Greece, irrespective if the country is economically doomed under the current program.
Historically, the EU Commission has been on the side of the smaller Member States. But the show is now run from Berlin.
Varoufakis has argued that the Finland-dictated February 28 deadline is “artificial” but his argument seems to be getting little traction. For reader convenience, here are key political dates, courtesy the Financial Times:
February 11 Emergency meeting of the eurogroup, the committee of 19 eurozone finance ministers, to kick-start negotiations over a possible new bailout for Greece.
February 12 EU summit in Brussels, the first attended by Greek PM Alexis Tsipras, who is expected to meet German chancellor Angela Merkel on the sidelines.
February 16 Regularly scheduled eurogroup meeting which ministers have said is the deadline to agree an extension of the EU’s bailout programme, which Mr Tsipras has already rejected.
February 28 Eurozone bailout programme ends. Without an extension, Athens will not receive final aid tranche of €1.8bn.
March €1.4bn payment due on IMF loan and around €1bn to other creditors.
The Finns are as famously stubborn as the Greeks are showing themselves to be. As Swedish Lex noted:
The Greeks (Syriza) and the Finns thus actually have a lot in common, actually; Both are convinced that they right way, and the only way, is to not compromise on matters of (their respective) logic and principle.
Two small proud peoples pitted against each other (since there is no federal structure in place to make sure that problems like these never occur, but that is another story).
And if, miraculously, Greece manages to get some negotiating runway, which will likely be due to the US pressing its case harder as a train wreck looks more imminent, one of the requirements is almost certain to be that Syriza stop taking its case to the citizens of other Eurozone countries, and limit its remarks to what is necessary to keep Greek citizens appraised. It will be hard enough to bring the governments that Syriza is threatening to upstage to the negotiating table, and they are sure to require that the upstart party not undermine their standing with their own voters.
Financial time has a nasty way of moving much faster than political time. Even with the recognition of how much is at stake, too many key actors have strong incentives to serve their own parochial interests rather than try to salvage the Eurozone project. That behavior has been reinforced by the seeming success of years of extend and pretend. Syriza’s appeals to support to support the Eurozone are falling on deaf ears because the political classes have no real interest in moving the project forward. Syriza is thus playing the unfortunate role of exposing the degree of rot at the core.