For those who may not be familiar with American cultural references, we’ve previously cited this scene from the Godfather relative to the Greek negotiations:
Michael: Well, when Johnny was first starting out, he was signed to a personal services contract with this big-band leader. And as his career got better and better, he wanted to get out of it. But the band leader wouldn’t let him. Now, Johnny is my father’s godson. So my father went to see this bandleader and offered him $10,000 to let Johnny go, but the bandleader said no. So the next day, my father went back, only this time with Luca Brasi. Within an hour, he had a signed release for a certified check of $1000.
Kay Adams: How did he do that?
Michael: My father made him an offer he couldn’t refuse.
Kay Adams: What was that?
Michael: Luca Brasi held a gun to his head, and my father assured him that either his brains or his signature would be on the contract.
A Eurogroup meeting ended if anything with Greece and its creditors even more alienated from each other. Greek finance minister claims he was ready to give a proposal (and he apparently did set forth some of his ideas) but wasn’t given an audience; the other participants told the press that Varoufakis’ idea of what a proposal amounted to was out of synch with what they wanted. This sort of culture clash has been a constant feature of these talks. From Politico:
Take this counter-claim from an EU official: “A debt brake, fiscal authority and debt swap: They are nice but none of that replaces the need for reforms … We still do not have a proposal. There was no substantial discussion, to be honest. I didn’t see a five-page proposal, I saw a verbal presentation of his ideas and Dijsselbloem said we need a proper proposal…”
Michael Noonan, the Eurogroup elder statesman from Ireland, was the most specific about the Varoufakis contributions. “They tend to be more macroeconomic in nature than specific. And negotiations are about specifics.”
If an account in the Financial Times is accurate, an emergency summit of Eurozone leaders set for Monday evening is prepared “an offer you can’t refuse,” meaning an offer less generous than one previously made because the other party is signaling his superior position by worsening terms. Recall that it was leaked on June 8 that European Commission president Jean-Claude Juncker and Eurogroup Chief Jeroen Djisselbloem offered Greece an extension of the current bailout till March 2016, with the strings attached that Greece would still need to agree to cross its red lines and agree to pension and labor market “reform”. We stressed that it was not clear whether Juncker and Dijsselbloem had gotten IMF and ECB consent, or whether they needed to sell them on the plan in the unlikely event Tsipras had agreed.
Now I doubt the “offer you can’t refuse” element (assuming the rumor proves to be accurate) is by design but due to the fog of negotiations and the looming deadlines limiting flexibility. Regardless, the Greek side is certain to reject a proposal of this sort with prejudice. From the Financial Times:
Jeroen Dijsselbloem, the Dutch finance minister who chaired the ministerial gathering in Luxembourg, for the first time acknowledged that time had run out to disburse rescue funds to Athens before the bailout programme closes at the end of the month.
Instead, Mr Dijsselbloem said any agreement would now need an extension of the programme into July — the third extension in six months — heightening the risk that Greece will default on a €1.5bn loan repayment due to the IMF in less than two weeks.
“It is unthinkable the implementation [of reforms by Greece] and then disbursement would also take place before the end of the month,” Mr Dijsselbloem said.
If a deal is reached and an extension agreed, among the options being discussed by creditors is using €10.9bn in existing aid previously set aside to recapitalise Greek banks and redeploying it as normal bailout funds that Athens could use to pay its upcoming debts.
Athens faces €6.7bn in bond repayments in July and August.
But Mr Dijsselbloem made clear that no extension would be granted unless a deal were struck on economic reforms…
Mr Dijsselbloem rejected Mr Tsipras’s continued demands that any agreement include debt relief. Several officials believe the Greek premier will be unable to sign a deal without some kind of debt restructuring. Eurozone officials said leaders were prepared to offer the promise of future writedowns, but not as part of the current deal
One wonders why the creditors are bothering to convene, given that both sides are too wedded their current positions to make needed concessions. It seems to be at best an effort to have a talking point if needed if and when a Grexit proves to be as damaging as some fear. Political leaders need to be able to tell voters that they did what their best, even if their best was not all that good. A Politico story suggests that the summit will also focus on how to contain the damage of a Greek default and/or Grexit.
As is typical with the disconnect with realities on the ground, an FT editorial urges Tsipras to accept a deal, then describes one that is markedly more generous than the creditors are willing to offer.
The dire remarks of the head of Greek’s central bank, as we predicted, considerably accelerated the bank run, with €3 billion withdrawn so far this week, outpacing the ELA increase. As readers may recall, the head of the bank of Greece submitted a dire report on the likelihood and consequences of default and Grexit. It didn’t help that Reuters reported that a member of the ECB’s governing board was reported by Reuters as expressing uncertainty as to whether Greek banks would open on Monday. The ECB promptly denied it.
The ECB will have a call Friday to approve an ELA increase between regular two-week reviews. It would take a 2/3 vote to deny it. Varoufakis denied speculation that Greece would impose capital controls. Per the Financial Times:
“A monetary union that has accepted capital controls is a monetary union that has accepted that it has failed in its duty to preserve the free flow of capital,” Mr Varoufakis said.
As we’ve said, the ECB is the real power player, and it will play a decisive role in coming weeks. Greek banks depend on ELA support and the ECB will determine if and when it is withdrawn, which would force a depositor bail in or a Grexit. From Politico:
Economists are divided over whether the ECB would sustain its aid to the banks.
“If there’s no prospect for another aid package, I don’t think the ECB will end the emergency liquidity,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt. “It would be the right thing to do, but it’s a deeply political decision that they don’t want to make.”
Still, Greece faces a number of large bond repayments in July. Those bonds are held by the ECB. It would be difficult for the ECB to help Athens if it fails to make the payments. Doing so would amount to using its printing press to fund a defunct state, a clear breach of its charter.
We may have a clue as to how Draghi is leaning. In his presentation to the EU parliament on Tuesday, he stressed in his discussion on Greece that the ECB is a rule-based institution. If he holds to that view, the ECB would not be able to keep supporting Greek banks if the Greek government defaults on a €3.5 billion payment due July 20.
And note that as we have said previously, Russia is not about to ride in to the rescue. From the Telegraph:
Meanwhile, Greek prime minister Alexis Tsipras arrived in St Petersburg to meet with Russian president Vladimir Putin to discuss Russia’s planned extension of the ‘Turk Stream’ gas pipeline and a BRICs bank.
Russian Deputy Finance Minister Sergei Storchak said that despite speculation “there have been no requests [for help from Greece]”. He added that “there are no resources [in our budget to provide money].”
So the high drama will continue next weeks. Sadly, no probable set of outcomes looks good for the long-sufffering Greek people.