The financial media has become so inured to the now almost ritual nature of Greece-Troika brinksmanship that a Bloomberg op-ed today called it Groundhog Day. But despite the deja vu of having Greece threaten default and somehow scrape together enough money to make its next payment date, or seeing Alex Tsipras say yet again that a deal is nigh while the creditors shake their heads, Greece looks unable to avoid crossing an event horizon by the end of June.
However, the current situation, as Lambert put it, is overly dynamic, so rather than go overly far into the weeds, let’s focus on the boundary conditions. The biggest change in dynamics is that the various participants in among the creditors aren’t fully aligned in what they are saying. Mind you, they appear more unified in the past in terms of taking a tough stance relative to Greece, but appear to be jockeying to avoid blame in the event of a Greek default.
Tsipras will not able to cross his “red lines” unless he forms a new coalition. Not only has the hard left of Syriza (about 1/3 of its representatives) made it clear that they won’t support Tsipras if he concedes to the Troika on issues like pension and labor market “reform,” but it also appears the hardliners are winning converts from party centrists. In a central committee vote over the weekend, Tsipras got 95 votes supporting his program, versus 75 for a plan from the so-called Left Platform that included leaving the Eurozone. Tsipras also said he would not accept “negative votes” from party members if he chinches a deal. That has a hollow sound if the Left Platform can argue that the particulars (like a compromise on pensions) is tantamount to crossing the famed red lines. And in the event that Tsipras were to come back with an agreement that the Left Plaform rejected, one can imagine that the Left Platform would seek a vote of no confidence. Since Tsipras’ continuing, not credible “a deal is nigh” talk is apparently meant to slow the ongoing bank run, one can imagine what a leadership crisis would do.
The IMF offering to give Greece a teeny bit of breathing room isn’t all that generous and may be about the blame game. Most media outlets are focusing on the €300 million payment due June 5. Varoufakis has cheerfully said that payment will be made, since Greece will have a deal done by then. All the creditors have taken exception to the latest barrage of statements by Greek officials that an agreement is at hand. And Varoufakis’ remark sounds an awful lot like an admission that Greece will default if it does not have the dough.
On the one hand, Merkel clearly and decisively backed that the IMF has to be satisfied before any funds are disbursed, making the agency the official enforcer. And Lagarde has been making tough noises, saying that the IMF is not about to do a quick an dirty deal, that if Greece defaults, it’s not eligible for further funding and even saying yesterday that a Grexit is possible, which is meant to signal that the IMF is not going to engage in heroics to prevent that outcome.
So what do we make of this seemingly generous offer by the IMF, as reported by the Financial Times?
The IMF confirmed on Thursday that Athens would be permitted to delay all its June repayments until the end of the month, removing the threat that Greece could default as soon as June 5, when €300m falls due.
At the same time, fund officials warned the G7 gathering that Athens was still far from a deal to secure much-needed rescue aid, as it had failed to deliver credible reform proposals….
William Murray, an IMF spokesman, said Greek officials had not asked for a “bundling” of its June payments, as permitted by a little-known rule introduced in the 1970s, but “they are entitled to do that if they want”.
Just what the market reaction to any such move by Greece would be is unclear. It has been invoked only once — by Zambia in the 1980s.
The idea of bundled payments was apparently mooted by Peterson Institute official Jacob Kirkegaard and has gotten some media play. And since there is an existing rule and precedent for its use, it would seem pretty much impossible for the IMF to deny Greece the use of this option. The fact that Greece has not asked suggests that Greece may not ask until the 11th hour, since despite Varoufakis’ coyness, it may yet again be able to scrape up the dough for this payment.
Note that Greece has a total of roughly €1.2 billion of payments that fall on June 12, 16, and 19. Thus those are the payments it seems almost certain to need to push back, even if it can get by on June 5.
In another Groundhog Day move, Tsipras is again trying to circumvent the Troika (most important, the IMF) and appeal to Merkel. From ekathimerini:
With negotiations between Greece and its creditors at a critical phase, Prime Minister Alexis Tsipras on Thursday sought the assistance of German Chancellor Angela Merkel and French President Francois Hollande in a teleconference call….
The desire in Athens to seek another intervention at the political level came as technical talks appear to be moving slowly despite claims by Greek officials on Wednesday that an agreement was all but in the bag….
Sources said that during a Euro Working Group teleconference on Thursday, Greece’s representative, Giorgos Houliarakis, was advised that unless Athens can reach an agreement with the institutions in the next few days there may not be enough time for eurozone parliaments to approve a deal before the end of June and ensure there is a disbursement. If Greece does not receive a new bailout tranche, it risks defaulting next month, when it has some 1.5 billion euros to pay back to the International Monetary Fund.
Notice that this timetable assumes that Greece asks the IMF for bundling. Also note we’ve assumed, as the February negotiations showed, that the timetable for parliamentary approvals can be compressed a bit, but there are still minimum times for tabling legislation (and some rounding up of votes may be required). Thus we’ve assumed the real drop-dead date falls in the week of June 15.
This call seems desperate given how decisively Merkel threw her support behind the IMF process. While Merkel is free to relent, the point of her message seemed to be to force Greece to make a better offer, and it has yet to supply one. The ekathimerini article effectively confirmed that Greece has not sent a new integrated proposal, and is going issue by issue:
Athens made a fresh proposal regarding new value-added tax rates at Thursday’s meeting of the Brussels Group with the aim of increasing revenues this year by 850 million euros, even though lenders are looking for a boost of 1.8 billion euros.
And remember, the VAT is one of the areas where the Greek government is touting progress.
The IMF appears to have thrown a spanner into the overall process. Recall that Lagarde has said that the IMF is not going to cut corners, and that they also expect a deal to include debt relief by the Eurozone lenders. The Eurozone does not seem to be at all on the same page. Per the Financial Times:
But the fund is also turning the screws on eurozone bailout lenders, saying they will need to offer some relief on existing rescue loans and provide new aid if any economic package is to be “sustainable”.
The G7 official said: “There has been no concrete discussion on the financing of the debt. There has been no other discussion other than acknowledging that this has to add up.”
Asked about possible future debt relief, Pierre Moscovici, European commissioner for economic affairs, indicated that he did not rule it out, once comprehensive reforms were in place, saying: “We’ll see later on what kind of further arrangements can be found.” He added: “We need to work day and night to find an agreement. No matter what the date we have little time. But an agreement is certainly possible.”
The Moscovici remark is tantamount to a rejection of the IMF position, that the debt reduction has to be agreed in concert with the IMF participating in the bailout. Moscovici is clearly saying that the reforms (the structural form package that is under discussion) comes first, and “later” as in separately, come “future arrangements” on the debt.
Realistically, there is no way the Eurozone lenders can agree to a debt reduction deal by the end of June even if one were tabled now. It’s complex and would be fraught if the IMF were to conclude that principal reductions were needed (as in further extensions of maturity and interest rate reductions wouldn’t give Greece enough relief). TGovernment accounting rules require principal writedowns to be recognized as losses. That is a third rail issue with taxpayers.
In reality, the IMF has been here before, as in demanded debt reduction and agreed to fund Greece without having a firm deal with the other lenders. So why is it raising the issue now?
One is to help shift blame for the obviously failed Greek program. But it may also be to assure its control of the negotiations by stymieing the idea of a partial bailout (that of the non-IMF lenders giving Greece funds for advancing a partial list of reforms).
The ECB and IMF don’t seem to be on the same page. The disconnect among the ECB, IMF and Eurogroup may reflect that they have yet to come to grips to how to deal with a Greek default. Notice how the ECB, or at least one ECB official, was leery of the idea of an impasse:
The European Central Bank warned that the Greek debt crisis could spread to other at-risk eurozone countries if Athens fails to reach a financing deal with its international creditors quickly, underscoring the high stakes involved in the negotiations.
Meanwhile, International Monetary Fund Director Christine Lagarde said in a German newspaper interview that a Greek exit from the euro is a possibility, contradicting comments earlier Thursday by ECB Vice President Vítor Constâncio that effectively ruled out such a scenario.
It’s not clear that Constâncio’s comments are definitive. Mario Draghi and other ECB governors have said they’d greatly prefer that Greece not default but they think they now have the tools to handle it. The ECB trying to increase pressure for a deal may be that the central bank is concerned that it will wind up being the heavy if the negotiations drag on. Greek banks are running out of eligible collateral for loans under the ELA. The run is sure to get worse if (as appears likely) the negotiations remain stalled as the IMF debt clock keeps ticking. Some estimates indicate suggest that Greek banks will run out of collateral as soon as mid-late July.
In a Blooomberg story today, Mohamed El-Erian describes how game theory predicts how a negotiation like this is certain to fail. The two parties already had a bad history with each other and are unable to get to a strategy of serial cooperation. Instead, when the counterparties oppose each other, a lose-lose outcome results. We’ll only see with the fullness of time who winds up being the bigger loser and what that price turns out to be.