Ambrose Evans-Pritchard has a new article on Greece’s scramble to find the funds to meet it March IMF payments, which are €1.5b in total, with €300 due on Friday. Note that IMF payment dates aren’t as hard and fast as credit card due dates; the agency allows borrowers some leeway if they have a clear intent to pay.
Nevertheless, Evans-Pritchard’s most important observation may be the one at the close of his article:
Whatever piece of paper they signed in Brussels 10 days ago, the two sides are still talking past each other.
In other words, the two sides disagree profoundly as to what the memo means. And that may mean that in reality, there is no deal at all.
I had described the memorandum that was signed to extend the current so-called bailout for four months as a letter of intent, and was worried about using that term, since in the US, smart lawyers make sure to specify that a letter of intent is non-binding. By contrast I assumed that both parties were committed to the process outlined in their February pact. But the ambiguity that was cited as a virtue that allowed both sides achieve closure so that the bailout did not expire on February 28 and to present the agreement as a win to domestic audiences may be backfiring.
From the Troika/Eurogroup side, there are logical reasons for them to see Greece as a supplicant who is in no position to bargain. If you are a borrower who has to go to market to refinance, which is in some ways the position Greece is in, you have to accept the terms on offer. The alternative is a default on its non-IMF debt*, which if Greece could do without leaving the Eurozone, is the best of its unattractive options.
However, the ECB has the whip hand here. It is not clear that the ECB’s governing board would allow the critical bank lifeline to Greek banks, the ELA, to continue. An informal poll of there central banking experts by former IMF staffer Peter Doyle showed that two of the three would not be willing to continue the ELA if the bailout deal had expired; a default is a worse fact set. If the ECB were to terminate the ELA, Greece would have to move rapidly to support its banking system, and have a bank holiday, impose capital controls, nationalize the banks and issue drachma so it could shore them up.
Moreover, Greece said it wanted to stay in the Eurozone no matter what. That puts them in a position of needing to rely on Eurozone institutions and having good working relations with them in order to get some variances here and there.
The process of the negotiations sent a strong message that the creditors see themselves as in charge. As both Der Spiegel and the Financial Times reported, there was no negotiation of the memo. Varoufakis was excluded from the drafting and Tsipras was given a final version and told he could take it or leave it (the pink paper says he was permitted to change one word).
Greece was again reminded of its petitioner status when it submitted its initial draft of structural reforms. While it was accepted as a starting point for further negotiations, both the ECB and the IMF stressed that it did not show anywhere near enough commitment to completing the reforms in the current package. The ECB did say it was willing to consider substitutions if the changes had no negative fiscal impact; the IMF’s tone was less accommodating.
While it isn’t clear what the Troika and Eurogroup will and won’t accept, the structural reforms, as we predicted, are the big point of disagreement. Sources report that the IMF had regarded the primary surplus targets as unrealistic and expected to give ground there. Varoufakis stated that the Eurogroup had agreed on the humanitarian reforms, which Syriza costed out in its campaign platform as less than €2 billion.
However, my contacts say Greece is unlikely to get break on pensions, which was an important promise by Syriza (as in not “reforming” pensions). And it is not clear whether the IMF is willing to concede to Syriza on privatizations. Varoufakis’ point is valid: selling at fire-sale prices makes no sense. But the IMF regards Greece as a problem child that has already demanded and gotten way too much in the way of attention and special treatment. So the agency may dig in its heels out of feeling they need to preserve its bureaucratic authority and not let other countries get the idea that being difficult will lead to more lenient treatment.
By contrast, Syriza thinks it has a very different deal, as reflected in the draft reforms it submitted, which were cut back only around the margin from its campaign promises. Paul Mason points out that Syriza voted through some measures last week. I don’t read this as being as strong an act of defiance as he did, since most were on the tacitly-accepted humanitarian reform list, and the others looked like the had minimal fiscal impact. But the bigger issue may be the breach of procedure, of moving forward with measures that aren’t top priority for the creditors, namely, improving tax collection, and cracking down on inefficiency and corruption, and worse, not getting Troika and Eurogroup approval either.
However, as Ambrose Evans-Pritchard reports today, the Greek government has moved its defiance into a higher pitch, and is now threatening default if it has to comply with the old (or presumably most of the old) structural reforms. He discusses that Greece might raid some central bank “hidden reserves,” meaning pension assets, to make the IMF payments, since Greece must preserve its creditworthiness there (if it does depart the Eurozone, the IMF would be its only source of emergency lending, although with Greece up to its borrowing quota, it’s not clear how much if any additional support the agency would provide). That stopgap is fraught legally, plus it runs the risk that Greece will not have cash on hand for its April pension payments. As we mentioned yesterday, Greece is seeking to renegotiate its July and August payments to the ECB of €6.7 billion
Here are the sections on the Greece view of the memorandum:
Relations between Greece’s Syriza government and the rest of the eurozone remain extremely tense despite a fragile ceasefire agreed in Brussels to buy time and prevent a forced ejection of Greece from the euro, a development ruled as unthinkable by the leaders of Germany and France, and the European Commission….
Mr Varoufakis said Greece did not want any further money if it meant having to buckle to Troika terms. “We won’t take the next tranche if the price is having to continue with the ‘Memorandum’. That is not what the people voted for,” he said. It is a thinly-veiled warning that Greece will default on €300bn of combined liabilities to EMU entities and states if pushed too hard, regardless of what this implies for monetary union.
Paul Mason also noted that, “It was reported that, during a phone conversation with Angela Merkel, Mr Tsipras threatened Greece would default on its debts if pushed too far.”
The strident Greek tone, and the charge made the Spanish and Portuguese governments over the weekend of seeking to undermine the new government, suggests that they believe they have the upper hand, that they will not be pushed out of the Eurozone.
But what matters is not what Greece believes, but what the parties negotiating against him believe. The Germans, Baltic countries (which fall in with Germany), the Finns, the Spanish and the Portuguese, for different reasons, all believe that having Greece leave the Eurozone is preferable to giving it too many breaks. I’m not convinced that Merkel reining in Schabule was based on fear of a Grexit as much as a recognition that he was becoming a liability, pressure from the US, UK, and NATO, and perhaps also persuasion from the European Commission, which was acting as a go-between, that Germany could get what it wanted by giving Greece some face-saving optics.
And the fear of may of the major players may not be of a Grexit per se but an unplanned, as in disorderly Grexit. While I am told Greece is making contingency plans, I don’t have details and suspect it amounts to the use of parallel currencies rather than introducing the drachma. The ECB in many ways is the real power player here, and rumors out of the ECB that were not denied were that the ECB is extremely frustrated with Greece and can explain its conduct only via Greece actually wanting a Grexit but not wanting to be responsible for setting it in motion. But that view is contrary to Greece’s posture and recent actions, and is thus another sign of how poor communications are.
Now narrowly speaking, Greece may have the measure of its counterparties right. They probably are extremely loath to pull the trigger. But they don’t have to do that. All they need to do is keep withholding the bailout funds and denying Greece access to funding markets. As we’ve said, Greece needs money well before the deadline for it to complete its reform list and have it approved by the Troika and the Eurogroup. All they need to do is play good bureaucrats, smile, and insist that nothing has changed. They need to see a reform list that they can accept and that Greece has started to implement. Greece might get through March, but given the anxiety level in Evans-Pritchard’s column, April is dodgy. What happens if the new government can’t pay all of its bills coming due, or has to use a funny-money scrip?
As we’ve said before, financial time moves faster than political time. And despite the fact that Greek government has a potent threat, that of default, its need for cash, and the ability of the Troika and Eurozone to starve it out before July and August ECB payments are due, may give them the advantage.