As we said two days ago, despite talk of a breakthrough as Greece submitted a proposal to creditors that amounted to crossing one of its famed red lines, pension “reform” as in cuts, the tenor of comments of key people to the media were nowhere near as positive as they should have been if a deal were on track. But even with the understandable concern that it might prove difficult to work out fine points in time and close remaining gaps, the creditors led by the IMF, stunned most commentators, and most of all Greek officials, by making their own proposal which pretty much rubbished what the Greeks had submitted.
Tsipras went to Brussels yesterday to try to rescue an agreement. In a very bad sign, there were few leaks despite the meeting with Lagarde, Juncker, and Draghi going until past midnight, seven hours in total. Press reports today all indicate little progress was made.
I’ve embedded the document at the end of the post; it’s already been widely circulated and discussed. Even if you don’t want to read it in detail, the amount of red inked revisions speaks volumes. The big changes are:
1. Changing the mix of cuts versus tax increases. The Greek proposal relied overwhelmingly on tax increases; the creditors doubt they’ll raise enough funds, given how tax payments have dropped since Syriza has taken office. Moreover, they also believe that some of the tax increases will harm the economy (as if that’s ever been much of a priority in their thinking) more than spending reductions will. The creditors, in a minor sop to Greece, did relent on taxing electricity at the highest VAT rate of 23% as they had once demanded. However, they also got rid of a one-time wealth tax of 12% of all corporate profits in excess of €500,000 this year, and reduced a proposed increase in corporate taxes from a rate of 29% to 28%. They are also proposing spending cuts, like ending diesel subsidies for farmers, and want defense spending reduced by €400 million versus the €200 million proposed by Greece
2. Although this is technically just a subset of 1, it’s such a heated issue for Greece that it merits separate discussion: serious pension cuts, and a much faster elimination of the so-called “solidarity grant” for poor pensioners.
The creditors have so little trust in the Greek government that they are demanding that the pension fund changes become effective as of July 1, 2015. As mentioned earlier, they also want key legislation passed by the Greek parliament by Sunday so that the German parliament has that in place before it ratifies the bailout. Given that the earlier timetable assumed that officials would be working on drafting legislatoin today, when the two sides remain at an impasse, it’s hard to see how all the moving parts could be marshaled into place, even if someone figured out how to resolve the yawning differences. As the Financial Times noted this morning:
One eurozone official said trust between Athens and creditors had evaporated and “nervousness” had set in. “No one wants to budge,” said the official.
Now one has to ask, what exactly happened? Narrowly, one could say the creditors never moved from their five page memo they gave to the Greek side three weeks ago, which they had said was their statement of principles that was necessary for any deal to be done. But even so, why the cheery talk (well not exactly so cheery as we read it) of the window before the creditors shredded the latest proposal? Was it merely to cheer up Mr. Market or to give Tsipras a pat on the head for crossing his red lines before taking a hot poker to him?
If you’d managed to parachute into this situation today, just from reading that Financial Times story linked to above, you’d be hard pressed to see how the two sides could agree. The European Commission wants the IMF out but Germany insists it won’t agree to a bailout unless the IMF has signed off on it. Other Eurozone lenders likely feel the same way. But the IMF wants debt relief in this deal and Germany says no, that comes in the next agreement. And aside from the German “Nein,” it’s again hard to see how that idea could be sold to the now many other Greece-unfriendly countries that all have to approve any release of funds by June 30, or the €7.2 billion goes poof. The countries are unlikely even to agree to an extension to hash out details without some firm commitments from Greece.
On the Greek side, the offer earlier this week was as far, and potentially further, than Tsipras could go without breaking his coalition. His junior partner ANEL has already said not exempting some Greek islands from VAT increases will cost him their vote. Members of the Left Plaform (about 1/3 of the Syriza MPs) are also likely to rebel. There are rumors that Yanis Varoufakis will go into open opposition over the lack of debt reduction. But even though support for a Eurozone exit is rising among Greek citizens, it’s still far from a majority view:
— Marloes de Koning (@MarloesdeK) June 25, 2015
Tsipras can go to To Potami (opposed to a Eurozone breakup) and New Democracy to hopefully pick up the remaining votes, but that puts his government on a path to dissolution. And with the creditors pushing him even further, it’s hard to see how he can accede without losing what amounts to his manhood as a leader. Even just going outside Syriza to push a deal through is tantamount to career suicide.
The question is whether the Troika is pushing Tsipras beyond where he can go out of a desire to break Syriza or was simply exhibiting their pathological faith in economic quackery, aka austerity, as well as a related belief that members of the Eurozone needed to follow the rules. My guess, and again this is just a guess, is that the Troika is not actively plotting to get Tsipras out even though the path they are on looks awfully close to the same thing. But I suspect their actions are driven in no small measure by frustration and anger. I’m told it’s an old saying in therapy that you are most run by the emotions you are least comfortable with. While political leaders, as alphas, have all sorts of license to show their choler in private to their staffs, it’s quite another to do so in more public settings. An unseemly number of members of the officialdom have been losing their cool over how much time Greece has been consuming and the Groundhog Day feel of seemingly unending negotiations. And remember, if a deal miraculously comes together, the creditors expect to roll right into another set of talks with Greece over debt reduction!
I e-mailed some colleagues on June 16 saying that the Troika would find it necessary to get Syriza out, that they would feel compelled to break them because the prospect of having to continue to negotiate with them over the next bailout would prove to be too unpalatable and resource intensive. You can argue whether the irreconcilable positions generated the bad interpersonal dynamics. But once trust is gone and relationships have soured this badly, they are well nigh impossible to patch up. That might be fine when parties can deal with each other minimally in the future but that’s not the case with Greece as an IMF charge and a big borrower in need of a debt reworking. And being treated as untrustworthy, as Greece is by being required to make detailed commitments and implement plans immediately, is certain to feed into the dynamic of mutual antipathy.
The negotiations are continuing and the summit of European leaders continues into Friday which in theory allows for all day and night to try to salvage a deal. The fact that the Guardian isn’t running its usual live blog on the Eurocrisis today speaks volumes as to how little progress they expect to see.