I’m at risk of getting whiplash from watching the speed at which Greece is changing its position on key issues. And while I’d be delighted to be proven wrong, there are reasons to think this pattern does not bode well for the government’s ongoing negotiations.
The negotiations between Greece and its creditors are not garden-variety bargaining between two parties. These are complex multi-party dealings that are part of ongoing relationships. Thus they also involve a substantial amount of diplomacy. One of the things we flagged at the outset as a large obstacle for Syriza was the degree to which its messaging was public, and what it felt necessary to say to its domestic supporters might be at odds with what it might convey to its creditors, and vice versa.
Consider the advice of the father of diplomacy, Talleyrand, at the funeral of Charles-Frédéric Reinhard, who succeeded Talleyrand as Minister of Foreign Affairs in the Directory. Talleyrand was well into his 80s, and this address was correctly recognized as almost certainly the last time Talleyrand would make a public appearance. Tout Paris turned out to see him. Talleyrand discussed the requirements of the office, which were the skills needed by a top diplomat:
A sort of instinct, always prompting him, should prevent him from compromising himself in any discussion. He must have the facility of appearing open, while remaining impenetrable; of masking reserve with the manner of careless abandon; of showing talent even in the choice of his amusements…
Yet all these qualities, as rare as they are, might not suffice, if good faith did not give them the guarantee they almost always require. Here there is one thing I must say, in order to destroy a widely spread prejudice: no, diplomacy is not a science of deceit and duplicity. If good faith is necessary it is above all in political transactions, for it is that which makes them firm and lasting. People have made the mistake of confusing reserve with deceit. Good faith never authorized deceit but it admits reserve, and reserve has this peculiarity that it increases confidence.
Translation: a diplomat needs to be very sparing in his communications, since every remark will be seen as a potential commitment, and a sign of his trustworthiness.
Now one might think that Yanis Varoufakis understands this lesson, since he stressed in a New York Times op-ed that he was not engaging in game-theory type stratagems:
If anything, my game-theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.
So far, so good. But remember that various members of the Eurogroup talked about the need to establish trust with the new government. Now mind you, some of that needs to be taken with a big measure of salt, since some parties’ idea of “trust” is “knuckle under and implement the structural reforms the previous government agreed to.” But as Varoufakis acknowledged, he and the incoming government are the new kids on the block, and they need to establish at least a viable working relationship with the major parties: the ECB, the IMF, the EC, and at least a fair number of members of the Eurogroup.
There are signs that the diplomacy/relationship establishment part of this project is not going swimmingly. A recent Der Spiegel article, which was admittedly a bit of a puff piece for German finance minister Wolfgang Schauble, nevertheless had a revealing section. There’s a disputed account of a meeting in which Varoufakis allegedly yelled at the Eurogroup head, Jeroen Dijsselbloem repeatedly, calling him a liar. Varoufakis and Dijsselbloem both deny that this took place. But regardless of what happened, look at what transpired next:
The result was that last Friday’s Euro Group meeting was atomized, with small groups of two to four people meeting individually with Schäuble, with International Monetary Fund head Christine Lagarde, with European Central Bank head Mario Draghi and with Dijsselbloem.
Varoufakis quickly realized that he was alone, that the other 18 finance ministers were against him. But he took it as validation for his approach….
Prior to the beginning of last Friday’s meeting, Dijsselbloem had telephoned with European leaders to consolidate support behind his compromise proposal. German Chancellor Angela Merkel made it clear to Tsipras that there were no other alternatives. “It’s either that, or it’s over,” she said. And Tsipras relayed his decision to his finance minister: He had decided to give in. Thereafter, Varoufakis was largely uninvolved in the talks, sources say.
Understand what this means: last week’s memo was not negotiated. It was a diktat. The deliberate ambiguity was more a result of a recognition of the need for Syriza to be able to preserve its standing with voters than representing an intent to compromise with Greece. This story is confirmed almost in its entirety by a new account in the Financial Times, save that Tsipras did get one word in the memo changed.
Even the Greek press has come to the understanding that the agreement has more limited implications than some parties have attributed to it. From ekathimerini this morning:
The agreement between the Greek government and its lenders, which was sanctioned by the Eurogroup last Tuesday, appears to be more of a respite and less of a sea change in the relationship between the two sides. The apparent confidence gap is bound to aggravate economic conditions and undermine talks on debt relief unless it is bridged fast. Refraining from adversarial statements is the least they can do at this point, especially some ministers.
With that understanding of how fraught relations between Greece and its creditor are, let’s consider some of the news stories in the last few days. Greece astonishingly suggested it might not make the payment due to the IMF in March. Recall an earlier Greek kolotumba, that of claiming confidently that it had enough funds to get at least through March, only to have ekathimerini report a week or so later that the government would hit a cash crunch as of February 24. From the Wall Street Journal:
Greece’s cash-strapped government suggested in the past week that it might default on some of the debt it owes the International Monetary Fund in March, which would make it the first advanced economy in the institution’s seven-decade history to fall into protracted arrears with the fund.
It would also put the new Athens government on a par with a small group of mostly conflict-ravaged debtors that have stiffed the IMF—a list that includes Afghanistan’s Taliban, Zimbabwe strongman Robert Mugabe and coup-stricken Haiti.
Few expect Greece to shirk its debts to the IMF, but the suggestion alone highlights the deepening standoff between the fund and Athens over the country’s finances.
And the Journal had this tidbit:
A senior adviser to Prime Minister Alexis Tsipras on Thursday said Greece was prepared to ask for an extension on its IMF debt. “If we haven’t collected the 1.4 [billion euros] and, say, have collected 0.8 [billion euros] we will ask for an extension of two months,” said Greek Minister of State Alekos Flabouraris. “I don’t understand, what is the difficulty?”
This sort of flippant remark is not helpful. For those of you old enough to have been around in the stone ages of banking, when character assessment was a big part of deciding whether or not to make a loan, this “Why is paying on time a big deal?” earns you demerits. Remember that any renegotiation involves assessing whether the new government is committed. While Greece needs to be firm in negotiations, remarks like these are red flags. A few at this stage can be attributed to inexperience, but if it continues, the government will be seen as unreliable. One solidly left-leaning correspondent has already called the Greek government The Gang That Can’t Shoot Straight.
And the experts were right. Greece quickly retreated, with Varoufakis stating over the weekend on BBC that:
Of course, Greece would not be the first country not to meet our obligations to the IMF. We will squeeze blood out of stone if we need to do this on our own and we shall do this.
Varoufakis made other remarks to the media last week that caused more consternation. From Ambrose Evans-Pritchard in the Telegraph:
Greece is counting on quiet support from France and the European Commission. “There is a schism in the Troika,” Mr Varoufakis told a local radio station. “We will be talking with the Commission. The EC can coordinate with the ECB if it wants.”
This radio interview has caused outrage in Berlin precisely because it reveals what Syriza’s leaders are telling their audience at home, and how they interpret events. Once again he repeated that there will indeed be debt relief, and “very swiftly”, whatever the pro forma denials by the creditors.
It is hard to fathom the upside of disclosing one’s negotiating strategy, particularly when it is also insulting to your counterparties. Moreover, it is hard to see how Greece could pull it off. All the key European officials have established histories with each other. They know the various governments and official bodies priorities and pet peeves, as well as the personal quirks of the major players. The Greek government is at a massive information disadvantage, and on top of that, is not trusted. How can this be a foundation for driving wedges between parties that are also largely on common ground in their negotiating position?
Another own goal over the weekend was accusing Spain and Portugal of being part of an anti Greek axis,trying to topple the government before elections. That led to a response from Rajoy, per Reuters:
Rajoy said Spain had shown solidarity with Greece as part of the euro zone by helping with its bailout and urged Greece to fulfil its obligations and keep its promises.
“We are not responsible for the frustration generated by the radical Greek left that promised the Greeks something it couldn’t deliver on,” he said.
The Greek government tried to de-escalate, saying Tsipras’ remarks had been misinterpreted. However, Reuters, which broke the story, repeated the quote in the story about Rajoy’s response, meaning it stands by its original account.
So why are Greek officials too often making statements domestically that they have to walk back when the international press picks up on them? Syriza recent approval ratings are as high as 87% and polls on the bailout specifically show 56% approval ratings versus 24% against.
The problem may be a rift within the party:
— Yannis Koutsomitis (@YanniKouts) March 1, 2015
But concerns are also beginning to surface about the need of the government to start showing progress on reforms if it is to make headway with its creditors. Admittedly, as we have discussed, the government has been so busy with the Eurogroup negotiations that it was impossible for it to have taken control of the bureaucracy. Nevertheless, consider this section at the end of a new article in ekathimerini:
Nevertheless, getting over the state funding issue in March will not get the country far unless the Greek authorities start delivering on their commitments and some government officials, such as Finance Minister Yanis Varoufakis, who seems to like to talk to the press a lot, do less talking and more work.
Abstaining from statements which strain the relationship with the creditors is a must and should be a priority. Some of these statements may aim at the domestic audience and may serve internal SYRIZA party purposes, but they do more damage than good. This is more so in view of the negotiations that will take place in the weeks and months ahead for serious matters such as the sustainability of the debt in tandem with the proper magnitude of the primary budget surpluses and structural reforms to make the economy more competitive. The government should stop shooting itself in the foot by allowing some of its cabinet members to engage in verbal warfare with the creditors and undermine much needed trust.
This is in keeping with the latest statement of Eurogroup head Dijsselbloem, who is prepared to accommodate Greece by being willing to entertain releasing some of the bailout funds early, provided Greece agrees to and starts to implement some reforms pronto:
Greece must immediately start adopting some of the economic reforms demanded by its creditors if it is to receive much-needed access to emergency funds in the face of a mounting March cash crunch, the eurozone’s chief negotiator has warned.
Jeroen Dijsselbloem, the Dutch finance minister who leads the Greek talks as chairman of the eurozone finance ministers’ group, told the Financial Times that he was prepared to make a “first disbursement” of the €7.2bn remaining in Athens’ €172bn bailout as early as this month.
But the funds would only be transferred if the new Greek government, which for weeks has resisted implementing measures contained in the existing bailout after campaigning to kill the programme, adopted reforms the two sides could quickly agree on.
As you can see, this “tough love” is pretty heavy on the tough, particularly given that the reforms in question must not only be agreed to (as in the terms hashed out in sufficiently specific detail) but the Greek government must also have moved to implement them. Perhaps “start adopting” means only getting them passed by Parliament; otherwise, this seems like an impossible order to achieve this month.
I am by private sources that Greece is staring to make contingency plans, but the only external sighting is an Ambrose Evans-Pritchard on new drachmas designed by amateurs [Update: to clarify, Greece would want to keep any Grexit plans under wraps, but launching quasi currencies like tax anticipation notes is another matter]. But he argues that neither side holds the upper hand, since the prospect of a powerful Grexit is a powerful weapon.
That view may be part of what is informing the sometimes self-sabotaging aggressive Greek posture. And it may not be accurate. The US and UK press have expressed more concern about the risk of a Greek departure from the Eurozone. And recall that it took a lot of external pressure on Germany, not just from the US and UK governments, but from NATO too, to get Merkel to rein in Schauble.
However, the concern that led Eurogroup to relent may not have been about a Greek departure, but a disorderly Grexit. If enough of the hardliners (the ECB, the IMF, and the more bloody-minded members of the Eurogroup) share that view, Greece’s likely assumptions about its negotiating leverage, and what degree of concessions its “partners” are prepared to make would prove to be off base.
We have the possibility of a fatal misunderstanding of negotiating positions, as we did in the runup to the Lehman failure. Even though Hank Paulson was clear in telling Dick Fuld of Lehman that he could expect no rescue, Fuld never believed him. Yet any reader of the media could see the Bush administration saw another bailout as politically toxic after the backlash after the Bear Stearns salvage operation. By contrast, Fuld appeared to regard the Bear bailout as proof that Lehman would get one too if it exhausted its other options. As a result, he repeatedly overplayed his hand, including undoing a serious good bank/bad bank deal with the Korean Development Bank, which had a longstanding relationship with Lehman, that KBD reaffirmed after the collapse that it really wanted to consummate the transaction.
It would be better if I were wrong. Perhaps the Greek government will change gears when it gets into intensive negotiations with the Troika, which will presumably be less visible to the public and hence less politicized. If so, it will prove to be a better venue for understanding and hashing out differences. But even with improved communications, the Greeks still have an uphill road before them.