Today, Greece blinked. Despite leaks that suggested the government had decided to take a tougher line with the Eurogroup and was prepared to make a voluntary default on its €750 million payment to the IMF due tomorrow, Greek officials relented and told the central bank to send the funds onward. However, as we discuss at the end of the post, based on a tweet after we launched our post, that Greece might have gotten some eyewash.
We had indicated in our post earlier today that Greece may have made a tactical error, in that by saying that it had enough funds available, it was making clear that any failure to pay was elective. The reason is that the ruling coalition is getting close to the point of not having sufficient cash to meet salary and pension payments.
And even if Greece manages to make its end of May pension and salary payments in full, it’s hard to see how the government gets through June, when it has €1.5 billion coming due to the IMF with the first payment, €300 million, falling on June 5. If forced to resort to paying its citizens in funny money, it runs the dual risk of deepening the contraction and denting domestic support. However, Greece, like the Eurozone, has made an art form of pulling rabbits out of hats.
Nothing seems to have changed today, save exposing that the bluster in the Greek media and to friendly foreign reporters like Ambrose Evans-Pritchard, was not matched by action. Perhaps that reflects a pattern that we’ve seen before, that the messaging to the ruling coalition’s domestic audience is far more aggressive than what the government is prepared to do in practice. We’ve seen more than once how Greek negotiators, including Tsipras, will raise issues with creditors, then take a conciliatory line, but later make more defiant statements at home, seemingly walking back the position he taken with counterparties.
According to the Financial Times report:
Greece failed to get the statement from the Eurogroup that it wanted, to allow the ECB to give it more room to borrow. Since it is to the negotiating advantage pthe creditors is to keep Greece in the sweatbox, it seemed unlikely that they’d relent. That is how things played out today:
Some members of the governing hard-left Syriza party had pushed ministers to withhold the payment until eurozone finance ministers meeting in Brussels agreed to endorse progress made by bailout negotiatorsin recent days.
Athens has lobbied furiously for such a statement, which officials believe would allow the European Central Bank to lift the ceiling on its issuance of short-term debt, which would provide more breathing room for the cash-strapped government…
Ministers had only a perfunctory debate over the Greek programme, and issued a statement that was far more lukewarm than Athens had hoped — welcoming the improved atmosphere in the talks but warning that “more time and effort are needed to bridge the gaps”.
Such language is not expected to give the ECB the leeway it would need to lift its restrictions on Athens’ ability to sell treasury bills, which are almost exclusively purchased by Greek banks.
If this account is correct, this explains the veering back and forth in stories out of Greece regarding the government’s plans. As we’ve pointed out, the ruling coalition is boxed in by Syriza’s left wing, which holds 1/3 of Syriza’s seats and is thus able to bring down the government. But that also means that leaks about government plans or even statements by officials (since Greece’s ministers have a habit of not singing from the same hymnal) need to be calibrated, and that’s well nigh impossible if the story is based on anonymous sources. Tsipras himself is a moderate, as is Varoufakis, and by all accounts Tsipras is still very much in charge of final decisions.
Despite a flurry of negotiations over the weekend, the two sides are still at odds:
According to officials briefed on the talks, differences between Athens and its bailout monitors remain on nearly every major issue. The government is particularly digging in its heels over state pensions and collective bargaining rights.
The meeting proper was short, as expected, and took only about an hour. That means that the creditors did not table an ultimatum, as Kathimerini said they would. Was that just an idle rumor, or a contingency plan if Greece threatened default?
Germany is now talking up a referendum. This appears to be a “calling Greece’s euro exit bluff” gesture. Greek polls show the public approving of the government’s defiance (although with much smaller majorities than in February) but being firmly opposed to a Grexit, which is the card the government needed to be able to play to have any hope of negotiating effectively. From the Telegraph:
The German government has raised the prospect of an in-out referendum to decide Greece’s fate in the single currency, in a sign that Europe’s largest creditor has begun to make contingency plans for a Greek exit from the euro.
Speaking ahead of a meeting of eurozone finance ministers in Brussels, Germany’s Wolfgang Schaeuble said a plebiscite on Greece’s euro membership could prove to be “helpful” for the debt-stricken country and its creditors.
“If the Greek government thinks it must hold a referendum, then let it hold a referendum,” said Mr Schaeuble.
“That might even be a helpful measure for the Greek people to decide whether it is ready to accept what is necessary, or whether it wants something different.”…
The president of the European parliament, German Martin Schulz chimed in with the tacit endorsement, saying a referendum was a “possibility” but ultimately it would be up to the Greek government to decide.
Varoufakis rejected the idea of a referendum.
Greece remains in the sweatbox and the clock is still ticking. Greece needs to have the bailout deal concluded by the end of June. That means finalizing language and obtaining needed Parliamentary approvals. Its economy continues to suffer, reflected in a worsening trade deficit in April. While some observers have pegged the drop-dead date as end of May, we saw with the Eurogroup negotiations in February how the Eurocrats were able to work much closer to hard deadlines (and the bailout expiration date apparently is a hard deadline). So the actual limit for these talks reaching a resolution is probably early to mid June, which is still perilously little time given where things stand now.
Moreover we have the complicating fact that Greece has €3 billion in payments to the ECB coming due immediately thereafter, in July and August. The assumption of the officialdom back in February was that Greece would conclude the €7.2 bailout negotiations first, and the negotiations over the ECB debt would be part of larger restructuring negotiation (note that while European officials are extremely loathe to write down principal amounts, since that amounts to loss recognition and would be politically charged and would arguably necessitate charging taxpayers to make of the losses, reducing the value of the debt in real terms by extending maturities and lowering interest rates further isn’t a third rail issue. However, that does not buy Greece much as long as super low inflation/deflation continues.
Operationally, the creditors have not been willing to engage in the bigger restructuring talks till the bailout negotiations were completed. With those coming so close on the heels of the bailout talks (assuming the two sides find a way to agree), it’s hard to see how they get done.
Greece may also assume that defaulting on the ECB would be less damaging than defaulting on the IMF. We clearly won’t find out (as in we can’t run parallel experiments and compare results), but given that the ECB is the real power player, I’m not sure how “less bad” an ECB default would be if things were to come to that.
So Greece remains very much in play. Greece decided not to make a showdown today, but it may not have the luxury of choice come June.
Update. After our post launched, Yannis Koutsomitis published this tweet:
— Yannis Koutsomitis (@YanniKouts) May 11, 2015
This would seem to be a major concession, but this is an unconfirmed report, and we’ve had earlier instances of tweets by credible sources not pan out. Given that Koutsomitis is widely read, I’d expect MSM reporters to seek to ferret this out. If this account is accurate (as opposed to a leak by someone who wants to burnish the government’s image, particularly in the light of news reports in Greece yesterday that the government was going to hang toughh, we should see confirmation in the next day or so.
But even if this report pans out, this isn’t as big a break as this would seem to be on the surface. First, this is likely to be a one-time sop, as in Greece was allowed to tap a special reserve. Despite the IMF’s recent hard line, the IMF is now also in hot water with the EU member states for its efforts to shift blame to them for the failure of the IMF program in Greece (recall that well after the April 24 Eurogroup meeting in Riga, the Wall Street Journal reported that the head of the IMF program team had said the Eurogroup member states would need to write down debt before it would release any bailout funds). I’m told the IMF came under a lot of pressure, so if this rumor proves to be true, it may be part of an effort to placate the Eurogroup (as in this could well have been at least as much about keeping peace within the Troika as their joint strategy versus Greece).
Second, as an astute leftist source points out, this move would be consistent with keeping Greece in the sweatbox, meaning maintaining pressure on the government and the public in the hope that either the government will make significant concessions or will fall in popularity and be replaces with a more compliant coalition. Keep in mind what happened. Greece wanted the Eurogroup to make a statement that would allow the ECB to lift its limits on borrowing. If Greece got that type of breathing room, that money is fungible. It could go to paying pensions and salaries, or to hiring more people, as well as to paying outstanding obligations coming due.
By contrast, if the money was round-tripped to the IMF, this does not provide any relief to Greece as it is under increasing strain to pay its bills at home. It’s the sort of borrowing (and the use of the escrow is borrowing, which raises the question of how the IMF would account for it) of using your credit card to pay your mortgage, the very sort of think Yanis Varoufakis decried when he first took office. In other words, the officialdom is willing to finesse strategies, if it can find covert ones that won’t upset voters in the many countries who are dead set against giving Greece any breaks, to keep Greece current on its obligations, as long as Greece is still negotiating. But as we said, the longer negotiations go, the more economic stress in Greece grows, and the more domestic creditors the government has to delay paying, including eventually government workers and pensioners. That is almost certain to hurt the ruling coalition’s popularity, particularly given that civil servants are a big part of Syriza’s base.
Another report from a reader of the German press was that the head of the Eurogroup, Jeoren Dijsselbloem, said that Greece could get its bailout funds paid in tranches. This might sound like a concession, but Dijsselbloem made a similar offer months ago. So at least at first blush, this looks like window dressing.
As one reader said, central banks have all sorts of funny hidden pockets. Greece may be able to empty some more before this drama is over. But even this sort of relief has a limited runway.