As most readers may know, Greece and the Eurogroup ministers agreed to a memorandum last week that would replace the bailout that expires on February 28 with a four-month deal that the memo stresses is in the same framework. The reactions to the memo have been a politico-economic Rorschach test, with readings strongly reflecting expectations of Syriza and the interpretations of the considerable, deliberate ambiguities in the text.
But as much as the memo language was agreed by the ministers, it is not yet a done deal. The Greek government is required to submit a list of reforms to the Troika by the end of day Monday. If it is not approved, the Eurogroup will meet on Tuesday. Further, bear in mind that memo is technically not operative until it has been approved by all the Eurozone governments. In Finland and Germany, that means yet-to-be-obtained parliamentary approvals. We’ve stressed that we think they’ll both approve it, but there is a tail risk scenario that one of them will not ratify the pact (a reader describes the negative reaction in Finland, for instance).
Another critical assumption made by most reading the memo was that it could be taken at face value, that the difficult, and as Jamie Galbraith contends, disorganized Eurogroup was ceding control of the process to the professional bureaucrats of the Troika. We had argued that the Eurogroup would nevertheless be kept in the loop informally, since they will approve any disbursement of funds.
If this story in El Pais is accurate (hat tip and rough translation Santiago), they are still in the loop as far as vetting the Monday proposal is concerned, as opposed to involved only if the Troika is not satisfied. From the Brussels reporter Claudi Perez:
Germany asked that the reform list was sent to all countries, not just the ECB, the IMF and the Commission on Monday. And Spain and Portugal asked for explanations: Luis de Guindos, according to sources in Brussels and Madrid, claimed that the preliminary examination of the ECB, the IMF and the Commission “pass also the filter by the Eurogroup”, which will meet by teleconference. “If there is any objection we will convene another Eurogroup,” said Spanish sources.
If this is the case, this confirms my suspicion, and then some, that any ambiguities in the memo are likely to be resolved against, as opposed to in favor, of Greece. This is an important detail because it undermines the notion that the Greeks scored a win by circumventing the Eurogroup this week. See, for instance, this section of the Guardian story, From Greek warriors to battered soldiers waving the white flag – in a week:
And there is an argument that putting faith in the “institutions” of the IMF, the ECB and the European commission, instead of euro ministers, to test Syriza’s plan, may weaken Germany’s power of veto.
Greece may not be out of that woods yet.
Given that Monday night was treated as a hard deadline for getting the Greek proposals in, Finance Minister Yanis Varoufakis prudently turned in a draft in a day early. I had assumed this was for bargaining purposes, that Varoufakis might want to test how far he could push on issues that Syriza had promised to voters but the Troika was likely to refuse, such as halting privatizations or rewriting the ground rules for them, and reforms aimed at raising wage levels.
Whatever Varoufakis’ motives, the Sunday submission appears to have been prudent for other reasons: the Troika does not seem to regard it as specific enough. From the Financial Times:
Eurozone officials have for weeks complained that Mr Varoufakis’s reform proposals were not sufficiently detailed and had not come with estimates of how much they would affect the economy and government budgeting. Officials who have seen the weekend submission from Athens have indicated it is similarly vague.
The reforms would be “mainly of a structural nature” and would not include details of projected revenue increases or spending cuts, a Greek government official said. Still, Athens intended to spell out measures to crack down on tax evasion and fuel and cigarette smuggling that could raise about €2bn-€2.5bn this year, the official added.
Agence France-Press, citing Bild, reports that the draft list isn’t quite as thin as the pink paper indicated:
Greece has drawn up a €7.3bn tax hit list aimed at the country’s oligarchs and lucrative smuggling industry, a German newspaper said, as part of reform proposals due to its creditors.
European finance ministers on Friday gave Athens just over three days to draw up a list acceptable to its international creditors in exchange for a four-month extension of its debt bailout.
The German tabloid Bild reported that the Greek government hopes to garner €2.5bn in tax receipts from the fortunes of powerful Greek tycoons, citing sources close to the hard-left Syriza government.
A similar amount would be drawn from back taxes owed to the state by individuals and businesses, Bild said.
The report said an additional crackdown on illegal smuggling of petrol and cigarettes would yield another €2.3bn for the government coffers.
In fairness, the Greek government has been put in an impossible position. As we’ve discussed before, it has been so busy negotiating that it has not taken effective control of the bureaucracy. Presumably any of the mid-level officials of the old regime are either gone or can’t be trusted. Even where to find the germane information in all the various non-published records is a time-consuming task, let alone make sense of them and try to make extrapolations. And that’s made even harder as a result of the fall in tax receipts and probable further slowdown as a result of the bank run and cash hoarding.
Thus while it may seem entirely logical for the Troika/Eurogoup minders to demand detail before signing off on the memo, it’s hard to see how the Greek government can provide anything better than seat-of-the-pants estimates.*
So how to square the foregoing with Varoufakis’ cheery remark late week, quoted in DW:
Greece’s cabinet convened in Athens late on Saturday, racing to submit economic reform plans to its international creditors by a Monday deadline.
“The list will be submitted and I am absolutely certain it will be approved,” Finance Minister Yanis Varoufakis said after the meeting. “We are drawing it up as we speak, it will be completed tomorrow.”
We’ve stressed that the ECB has been driving this process more than most observers realize, by increasing pressure on the Greek government by effectively ending its access to markets, and by various steps that served to intensify the already-in-progress bank run. Recall that the ECB last week gave Greece a much lower increase in the now-essential backstop to Greek banks, the ELA, of only €3.3 billion versus the €10 billion it had requested. Various media reports indicated that Greece is expected to reach the ELA limits when banks reopen after a three-day weekend. That puts the ECB in the position of either having to increase the ELA on Tuesday if the Eurogroup were to object to the draft and call a meeting. That is certain to rattle Greek depositors and potentially even the sacrosanct markets. Indeed, El Pais suggests that it was the ECB that forced the Eurogroup to reach closure (or at least as much closure as could be reached) on Friday by agreeing on a memorandum with critical tasks nevertheless kicked over to the next week. Again from Santiago’s translation:
Draghi unblocked the situation last Friday, when several delegations wanted to lock the agreement until next Tuesday, till the “institutions formerly known as troika” (my quotes) had expressed their opinions about the list of reforms that Greece needs to present. The central banker caused panic among the partners – and has been warning Athens during weeks – by giving concrete, hard cash figures about the plight of the Greek financial system, which since December has evaporated 20,000 million in deposits, capital flight that would have increased with a new failure of the Eurogroup . “The ECB and the Eurogroup President made it clear that Greek banks have access to liquidity lines, but only for emergencies, not as a permanent solution. Everyone is aware of the looming dark stage whether entities reopen next Tuesday [Monday is a bank holiday in Greece] without agreement, “said one attendee. ECB sources explained that capital flight “was fuly known by partners, so it was not necessary to emphasize that aspect.”
This indicates that the ECB, having deliberately made matters worse, is implying that might not to increase the ELA if a deal is not done on by Tuesday morning. It could put all these concerns to rest by increasing the ELA or issuing a strong statement of support.
Thus it will presumably also press that the Eurogroup accept whatever Varoufakis submits, or if the Eurogroup is still not satisfied, perhaps add more detail as to what Greece is required to deliver when. Recall that Greece is still very much at the Troika’s and Eurogroup’s mercy, since no funds are disbursed until a final, presumably considerably more detailed list of proposed reforms are delivered and approved by the Troika and the Eurogroup.
As an aside, the ECB’s reluctance (or possible strategic feigned reluctance) to increase the ELA is separately appalling. As Marshall Auerback noted by e-mail:
While they stay in the Eurosystem, the ECB cannot deliberately let the banks go broke because it would be acting illegally. Its charter is to maintain financial stability and to provide sufficient standing facilities. Arguably, some of their actions did risk doing that.
Now it could be, as reported in FAZ, that the ECB believes that Greece is trying to engineer a Grexit but have it be the Eurocrats that push them out. Or it may be that Draghi isn’t completely sure that he can control the current rotation of the board, which has a particularly Greece-unfavorable mix of members entitled to vote. Or the move could be completely cynical (as in the ECB knows it will have to increase the ELA regardless but wants to do everything in its power to preserve the illusion, particularly with Greece, that it might not).
In any event, there is still the possibility that we could see a disorderly Grexit, or what one account called a “Grexident,” an exit triggered by mistakes rather than design.
However, with the ECB not afraid to invoke the Market Gods to beat the Eurogroup into line, the odds favor them using the same approach even if the Greek draft is not up to Troika working staff and/or Eurogroup standards, pushing them to sign off despite reservations.
But if that is how things play out, it would be a mistake to consider it a Greek win. Remember this is only the first step in an interim deal where Greece has to meet other Troika and Eurogroup targets, as well as work on the even more important task of negotiating what happens when other debt matures over the summer. The more that the Troika and Eurogroup continue to think that Syriza is not willing or capable of meeting its demands, the more any ambiguity in the memo will be resolved against Greece, except in those instances where a favorable resolution for Greece happens to coincide with what the Troika wants to do regardless. Similarly, the less smooth the process over the non-bailout baillout period, the less likely the creditors, which includes the Eurogroup, will be likely to be accommodating in negotiation over longer-term arrangements.
Reasonable or not, Greece has been put in the unfortunate position of having to appease its creditors to get any further breaks. They thus need to be good austerity designers and enforcers over the near term. That also means that remarks by Greek officials to the international media that look to be attacking the Troika or fomenting opposition to austerity in other debtor countries with governments that are making their citizens wear the austerity hairshirt would also be treated as demerits.
As a result, unless there is a serious procedural mishap on Monday and Tuesday, Varoufakis is very likely to be proven correct that his revised list of reforms on Monday will be accepted. But how bumpy that process turns out to be has significant implications for the long-term success of his effort to keep Greece in the Eurozone. The flip side is that there is the potential that even if this week is rocky, the Greek government could recover ground with its official minders once it does get control of the government, but it will need to be cognizant of how far it needs to go.
Thus no matter how you look at it, the new Greek government has a gauntlet to run between now and June. And as much as we’ve stressed that a Grexit is almost certainly an even worse outcome than acceding to the Troika’s demands, it is important to recognize that the best cases scenario for Greece is getting austerity lite as opposed to austerity regular. Even Varoufakis’ target of a primary surplus of 1.0% to 1.5% is still contractionary. Bill Mitchell estimates that Greece will need to run budget deficits of 10% of GDP to restore its economy to a semblance of normalcy. The US had unemployment levels in the Great Depression that were comparable to Greece’s now and have to run a much higher lever of deficit spending to pull the economy out of the ditch for good. T
All of these hard-fought efforts by the Greek government are to eke out gains that don’t even begin to reach the level of intervention that Greece needs. So it isn’t simply that last week’s memo is yet another example in a long series of the European elite’s fondness for “kick the can” solutions to pressing problems. It appears that if Greece is indeed the recipient of new and improved flavor of austerity, it’s a higher-order delaying tactic meant to buy years more of sullen acquiescence from long-suffering citizens in periphery countries.
*Given how appallingly inaccurate IMF forecasts have been, Greece can hardly be expected to do better, but with the “Greece needs to build trust” barrage from its lenders, Greece not going to be cut slack the way Eurocrat members of the club are.
Update 8:00 AM. Checked Twitter and see no leaks yet. We do have these reports:
— Yannis Koutsomitis (@YanniKouts) February 23, 2015
Am reliably informed that Greek reform list is 5 pages, including labour reform with ILO, and minimum wage (which will irk Berlin)
— A Evans-Pritchard (@AmbroseEP) February 23, 2015