Things are not looking good for Greece.
When Greece and the Eurogroup signed a four-month deal delineating how Greece could get access to desperate needed, so-called “bailout” funds, our reading of the agreement was that it reaffirmed the so-called Memorandum of Understanding, meaning the structural reforms that were part of the IMF loan program. That was very much a minority view at the time.
It has proven to be correct. But Greece, which has a very different interpretation of the same text, is refusing to move forward with the discussion of the reform program, at least as envisaged by the Troika and the Eurogroup. That in turn is pushing already-strained relations to the breaking point. And notice that this is consistent with another early reading, that the two sides had no overlap in their bargaining positions. That meant unless one side or the other decided to capitulate on a key point, the negotiations would fail. That is the current trajectory.
That means the inertial path is that Greece does not in fact get much or any of the bailout funds it had hoped to obtain by the end of April at the latest. While the government is scrambling to find cash to make payments to the IMF and perversely, on a Goldman swap this month, it is borrowing from the pension kitty to do so. That means if tax collections do not improve, it may come up short on pension payments in upcoming months. It is not clear whether Syriza will be able to maintain public support if it fails to meet its pension obligations in full.
And there is other evidence of the stress the government is under. Fresh releases of government data show that the government’s primary surplus was revised from an estimate by the previous government for 2014 of 1.5% to 0.3%. Worse, the primary surplus of the last two months was achieved only by virtue of cutting spending even further. Less government spending will only intensify the depression in Greece.
If you’ve been following the negotiations, there have already been signs that they are going pear-shaped. For instance, the Trokia has insisted that Greece submit a much more detailed version of its reform proposals; Varoufakis has not gone beyond a now-seven-page memo. And we have the bizarre contretemps stirred up in the German media over whether Varoufakis gave the finger in a presentation over two years ago when suggesting what posture Greece should take towards its creditors.
Here are some current sightings. From Reuters:
Greece frustrated its main creditors on Tuesday by refusing to update euro zone peers on its reform progress at a scheduled teleconference, insisting instead that the discussions should be escalated to Thursday’s European Union summit.
Describing the annoyance that has been building up among euro zone countries with the new Greek government’s approach, one euro zone official said: “For many people the teleconference this afternoon could be something of a last straw.”
Euro zone deputy finance ministers held a teleconference at 1530 GMT to get an “update on the state of play” on Greece, which is running out of cash and time to negotiate and implement reforms that would unblock loans to prevent it from defaulting.
But three sources with knowledge of the call said that, instead of an update, a Greek official had said these issues would be discussed by Prime Minister Alexis Tsipras at the EU leaders meeting in Brussels. Tsipras, whose left-led coalition took power in January, is due to meet German Chancellor Angela Merkel and French leader Francois Hollande as well as top EU officials.
Two sources said that one of the officials on the call, which the sources described as short, said following the Greek refusal to update that the creditors were “riding a dead horse”, suggesting the talks were getting nowhere.
European officials said they did not understand what Greece hoped to achieve by bringing the issue to the summit, where Greece is not on the formal agenda and could only be discussed in meetings on the sidelines and only in broad political terms.
This is at a minimum the second time in which Greece has tried to circumvent the process that it agreed to in the memo of late February, in which it would negotiate a detailed reform list with the Troika, which would then be subject to approval of the Eurogroup. Trying to renegotiate the shape of the table at this juncture is just about certain to fail.
And Greece’s moves to proceed with its own reforms in light of the lack of an agreement with the Troika are also being rebuffed. From Paul Mason of Channel 4:
At less than 24 hours’ notice the European Commission has vetoed a key law set to be passed by the Greek parliament tomorrow.
The so-called “humanitarian crisis bill” was set to provide free electricity for some households, and address poverty among pensioners and homeless families.
But in a communication seen by Channel 4 News, Declan Costello, director at the EC’s directorate for economic and financial affairs, has ordered the radical left-led coalition governemnt in Greece to stop. A planned law to allow tax arrears to be paid in instalments, set before the Greek parliament on Thursday, has also been vetoed.
Notice that the letter does not bar the humanitarian reforms per se, but stresses that Greece can’t implement measures willy-nilly but needs to do so as part of an agreed, coherent program. But Mason adds:
The European Commission had been seen as the most conciliatory of the bodies formerly known as the “troika”. Mr Costello’s letter effectively says that if the Greek parliament votes on the new law tomorrow, it is a violation of the compromise deal signed by finance minister Yanis Varoufakis on 20 February in Brussels.
And this might also be the reason that Eurogroup head Jeroen Dijsselbloem suddenly started talking about the idea that Greece should impose capital controls. From a second Reuters story:
After acrimonious negotiations in February, Athens got a bailout extension to the end of June and promised not to make any unilateral moves that could burden its budget.
With tensions still running high, Greece attacked comments by Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, who said pressure on Athens was growing and an emergency loan depended on real progress on reforms.
He said he wanted no repetition of events in Cyprus in 2013, when “the banks were closed a while, and capital controls – cash flows in the country and out of the country – were tied to all manner of conditions”.
Dijsselbloem is being more than a tad disingenuous. The Cyprus bank closures/bail in weren’t the result of some sort of misstep by Cyrus; it was a plan devised by the ECB. And the weapon that the ECB brandished to force the bank holiday and bail-in was the threat of the removal of the bank lifeline, the ELA.
Understand what is happening: if Greece proceeds with its humanitarian relief plan and violates the February 20 memorandum, the ECB would have a ready excuse for withdrawing the ELA. In fact, some former central bankers believe that in the absence of a refinancing deal being at least arguably on track, the ECB would be required to withdraw it. That would force Greece to impose capital controls and nationalize its banks. And to recapitalize them, it’s not clear that Greece could do so adequately with scrip like TANs. If Greece were to reintroduce the drachma, that would amount to a de facto Grexit. How the authorities react to that is very much open to question. Past legal analyses (the most germane is by the ECB) finds that there is not exit mechanism from the Eurozone; it is described as “irrevocable.” The EU, by contrast, does have a sketch of an exit process defined in the Lisbon Treaty: a member can ask to leave, and if the EU and the member can’t negotiate how to do it, it nevertheless becomes official two years later. Needless to say, two years is an eternity in financial time. And the ECB analysis hand-wrings that that provision contradicts other sections of the treaty.
As we have said, the best solution for Greece would be to default but stay in the Eurozone. But it is not clear that its creditors would tolerate that. A default will trigger politically costly loss recognition on the ELA and on Target2 balances, and those losses would almost certainly trigger assessments to taxpayers in Eurozone countries (even though the ECB could monetize the losses, like the Fed, the Bundesbank is allergic to that approach, so the ECB would need to get new capital from taxpayers). The creditor countries or the ECB on its own could get bloodyminded and force a de facto Grexit by removing the ELA pour decourager les autres from defaulting and daring to defy the Trokia.
Greece seems to believe that the Eurocrats would not dare go this route, that the cost of not giving them new money is far too high for them not to relent. But so far, the Troika is not budging. The authorities are acting as if their commitment to austerity, in the form of structural reforms, is so deep that they are prepared to put the Eurozone at risk to enforce them.
This is far from the first time we’ve seen this movie, where practical considerations were at odds with the political calculus. And in the cases of Creditanstalt and Lehman, politics won out.