Greece has decided to up the ante in its negotiations with the Troika. The open question is whether the latest move, the press leak via Ambrose Evans-Pritchard at the Telegraph that Greece will miss its April 9 payment to the IMF so that it can continue to make pension payments, and has started to make plans to issue the drachma, are game-changers that Greece hopes they will be.
The sources that spoke to Evans-Pritchard said that the government would be out of funds on April 9, the IMF due date. Note this is earlier than the most recently leaked drop-dead date of April 20. The Greek government cannot make that payment and also make pension and government salary payments due April 14.
Keep this in mind:
Investors have recognized that a Grexit was a possible outcome; indeed, the financial press was treating it as a far more likely outcome than the political press. With Greece running out of money, discussion of that possibility increased last week, with Warren Buffett even saying a Grexit could be good for the eurozone versus serious pundits like Martin Wolf warning that a Grexit would pave the way for other countries to leave. But even Wolf held out the option of a managed Grexit so as to reduce the dislocation.
So the idea that Greece might leave is hardly news. And Greece has made veiled threats officially, along the lines of, “We can only be pushed so far.” The question is whether the markets have really priced that in, since an adverse market reaction would give Greece more leverage.
Despite the dramatic sound of invoking the “d” words, so far, this is a bluff. Read the first paragraph of the Telegraph account:
Greece is drawing up drastic plans to nationalise the country’s banking system and introduce a parallel currency to pay bills unless the eurozone takes steps to defuse the simmering crisis and soften its demands.
If you read the article, Greece has yet to take a single concrete step towards issuing drachma, the most important being to impose capital controls.
Market reactions will be influenced by Eurocrat actions and messaging. Here Greece has given the officialdom a full four days, since Friday and Monday are holidays in non-Christian Orthodox Europe, to plan a response. No developed economy has defaulted on the IMF, but the flip side is IMF payment dates are loose. In fact, the Telegraph reports that it is a full six weeks after a non-payment before Greece would be declared to be in technical default, so the April 9 date is not an event horizon. Moreover, Greece was already up against an end-of-month deadline to conclude its bailout fund negotiations, so missing the payment in and of itself does not change the overall timing parameters. Note some analysts worry that there could be more serious knock-on effects. For instance, we have this dire take in the Ambrose Evans-Pritchard account:
Bank of America warned that a “critical sequence of events could unfold” once Greece misses a payment to the IMF. It would trigger a parallel default to the eurozone bail-out fund (EFSF) under the legal master agreement, and might force the EFSF to cancel its loan packages and demand immediate repayment. This in turn would trigger a default on Greek government bonds issued under the bail-out accord.
Since it highly unlikely operationally, given the long weekend, for the Troika to approve the reforms and then get Eurogroup approval to release the bailout funds, it seems more likely that the IMF would determine what sort of short-term fudge it needed to engage in so as not to trigger a default under the EFSF. Again, since there were doubts that Greece would be able to make all of its March IMF payments, it may well be that some “extend and pretend” gambit has already been pre-planned.
The leak will accelerate the bank run. One correspondent pointed out in February that anyone who was keeping deposits in Greek banks was a fool. Those who relied on the government statements that they were committed to remaining in the Eurozone will be forced to reassess, and if they have an operating brain cell, will drain their accounts.
The most immediate effect will be to put the ECB in a difficult position. In theory, the ELA is only for short-term liquidity problems at solvent banks. But the Greek banks are not solvent. The ECB has chosen to ignore that issue for the moment. But if the bank outflows are large, it may become more politically contentious at the ECB board, which decides every two weeks whether to continue the ELA, to keep funding it. The inertial path would be for the ECB to continue to provide bare minimum increases in the ELA as long as Greece is engaged in negotiations. The more conservative members of the ECB board might condition their approval on some sort of fig leave statement from the IMF in the event of a default.
The second-order effect of the worsening of the bank run will be to further damage the economy. Consumers who are nervous enough to have their cash in mattresses are not a free-spending lot.
Drawing the line in the sand on pensions is a tough sell in Europe. In addition to the creditors doubting the Greek government’s estimates of how much it could generate from its various revenue-boosting measures, they also objected to Greek plans to increase union rights and raise pensions to low-wage groups. Making pensions the rallying cry may be popular in Greece, but it has gotten resistance in the rest of Europe. The pension matter is so charged that in his press conference with Merkel in March, Tsipras felt compelled to say, “I haven’t come to Berlin to ask Germany to pay Greece’s pensions!”
Greece already has very high pension obligations compared to the size of its economy, so the perception is that Greeks get a better deal than retirees in other nations. More granular analysis indicates that the relatively high Greek pension burden is due mainly to an aged population. But that story is not well known, and the idea that other nations’ taxpayers are funding a believed-to-be better-treated retirees in Greece could be used as an important talking point against the Greek government. The Greeks have a much better case to be made by showing the terrible state of government services, particularly hospitals. It’s mystifying why they have not told that story better.
Greece seems to be pinning its hopes on Merkel. From the Telegraph story:
Syriza is still hoping that German Chancellor Angela Merkel can defuse the crisis, deeming her a “real ally”, but fear that she will be confronted with a fait accompli beyond even her control.
While Merkel has made statements that she would like to keep Greece in the Eurozone, she’s always stressed almost immediately afterwards that Greece needs to honor its commitments and implement reforms. While Merkel is clearly concerned about her legacy and a Grexit would tarnish that, she is also concerned about considerable domestic resistance to the idea of Greece getting off too easy and German voters being overburdened as a result, particularly if other creditors use the Greek precedent to push for similar breaks. There is a school of thought in Germany that a Grexit does more to preserve the Eurozone than cutting Greece a deal would. It’s not at all clear how she will resolve the tension she has been able to finesse so far.
If the Greek gambit does not pressure the Troika and Eurogroup to change their position much, the government could see its approval ratings decline further. As we’ve pointed out, the government has done nothing to build support for a Grexit. While it remains popular, its approval ratings for how it is handling the negotiations has fallen from a peak of 80% to 55%. A mere two days prior to this leak, Tsipras reassured Parliament that he was seeking an “honorable compromise”. This move is yet another kolotumba, but on a matter of primary importance.
If the creditors can pull it off, their winning strategy is to keep Greece in the sweatbox. Greece has effectively admitted that is it politically toxic for them to miss or come up short on pension and salary payments. If the creditors can finesse the IMF default and can stomach funding the accelerated bank run, their strategy for keeping pressure on Greece is to act as if nothing has happened and not accelerate the negotiations or find a way to issue a small emergency payment. How this comes out is likely to reflect the strength of the relative bargaining positions of the Greece hardliners, which are the IMF and ECB, versus the more conciliatory parties, such as the European Commission and the French government. And while Merkel may lean conciliatory, she has yet to take any concrete action.
We’ll see soon enough if the creditors blink. But as you can see, it’s not clear whether they will regard the Greek threats as something they need to take seriously or a move they actually expected.
Update 5:30 AM: Because Ambrose Evans-Pritchard has good source in the Greek government and has been sympathetic to the Greek position, I took his account at face value, particularly since he was quoting anonymous Greek officials. However, I see on the Guardian live blog for April 2 that one of its last entries was a denial that the Greek government would run out of funds on April 9. So is this a tempest in a teapot? A group of dissenters trying to pressure the Troika and Eurogroup?
This means that the negotiations are likely to be on the original track. But the question is who would launch a leak like that, and why would Ambrose Evans-Pritchard (who has ready access to Varoufakis) run it? The plot thickens.