Le Monde published a defiant op ed by Alex Tsipras over the weekend. I can’t fathom what Tsipras thought it would accomplish, beyond appealing to Greek voters. The article restates how the program that Greece has followed has led to disastrous economic performance and worsening debt to GDP ratios, paints the creditors as being unreasonable and inflexible, and depicts the EU as undemocratic and dominated by a “core” that increasingly inflicts anti-democratic austerity policies on other countries.
The wee problem is that Greece is well past the point where political appeals will work. It has been trying for months to escape the negotiating framework that was imposed in the February Eurogroup memo that it signed, that Greece would provide detailed structural reforms that had to be vetted and approved by the Troika first, and then by the Eurogroup. Greece has again and again tried to circumvent that process by going to European leaders, most important of all, Merkel. The not-triival impediment is that Merkel, a week ago, backed the process set forth in the Eurogroup memo and effectively told Greece that they had to satisfy the IMF. This missive is not only a blistering set of complaints about the IMF but also about Germany, and thus amounts to a poke in her eye. As Peter Speigel wrote in the Financial Times:
Greece’s chances of striking a deal to access a much-needed €7.2bn in rescue aid looked even bleaker on Sunday after Alexis Tsipras, prime minister, accused bailout monitors of making “absurd” demands and seeking to impose “harsh punishment” on Athens…
In an apparent attack on Berlin, Mr Tsipras also accused some within the EU of trying to break up the eurozone by centralising power among “core” euro members and tying the rest to “extreme neoliberalism” through EU budget rules. Germany has been the leading advocate of such rules and strong, centralised power in Brussels to enforce them.
Now we can agree that the Troika is being rigid, that their austerity policies are misguided and have been an abject failure. However, that is all moot. Greece due to the loss of its primary surplus (it has one on paper only by virtue of postponing all sorts of payments it will eventually have to make) is a supplicant. It needs the financing to stay current with its creditors. Its banks also depend on the continued munificence of the ECB. And by not being financially self-suffient, Greece is faced with the Golden Rule: he who has the gold makes the rules.
One may also argue that Tsipras has overstated his case agains the IMF (for instance, Tsipras depicts Greece as having submitted an adequate set of reforms when the IMF has said they aren’t detailed enough for them to assess them; he also implies that Greece and the creditors have settled on VAT reform: “We also agreed to implement a major VAT reform….” In fact, all that has been agreed to is a framework; the two sides are still far apart on how much VAT is to be increased).
Even in France, which has been the country most sympathetic to Greece’s situation, the op ed does not appear to resonate with the public. At best half the comments were favorable to Tsipras’ article.
Even though Greece has managed to put off its day of reckoning with its creditors, it will be very hard to go past the end of June. By all accounts, Greece is desperate for dough. Greek sources have said it can’t meet its €300 payment due June 5, but even if it manages to scrape enough funds together, it is well nigh certain it won’t be able to make the additional €1.2 billion total coming due on June 12, 16, and 19. As discussed, the IMF does have a rarely-used rule that would allow Greece to bundle its payments and defer them till the end of June.
Moreover, the underlying bailout deal also expires at the end of June. Extending it would require parliamentary approvals in some countries, including Germany and Finland, where getting an extension would be unpopular, as in politically costly.
But an even bigger reason for not letting the Greek drama go on much longer is the increasingly uncomfortable position of the ECB. Greek banks are on a path to run out of eligible collateral for ELA loans at its current deposit flight rate in a couple of months. This week, the ECB is again considering tightening, not relaxing Greece’s collateral rules. If Greece runs out of collateral, the next step is likely to be a forced bail-in, as the ECB imposed on Cyprus. That also involved a bank holiday and the imposition of capital controls, both of which also had nasty effects of the Cypriot economy. So as much as the Eurocrats are established masters of extend and pretend, a number of considerations argue against deferring resolution of the Greek matter much longer.
And the runway is even shorter than it appears. While we have argued that the some Eurogroup members will have to get parliamentary approvals to release bailout funds, which involves some lead time, that could be finessed to a drop-dead date of perhaps as late as the second or even the third week of June. But the Greek government almost certainly needs more lead time, since it will have to draft and pass legislation consistent with a deal for the funds to be released. Eurocrats worry that if Greece and the creditors don’t come to terms this week, it won’t be possible for Greece to get the bills finalized and approved in time. Even if we allow another week, that still means there is perilous little time, given that the two sides are still at a complete impasse on pension and labor market “reforms”.
Tsipras’ op ed makes sense only if he thinks the other side will capitulate. Yet the very fact of the op ed is tantamount to an admission that they aren’t yielding. What gives?
Tsipras appears to have been operating on some assumptions that are bad, and others that are questionable. We’ll see in short enough order how some of the questionable ones pan out.
Tsipras was apparently encouraged by the European Commission to think Greece could get bailout funds with little in the way of structural reforms. This makes the undue Greek optimism make a tad more sense. One of the parties Greece thought was key was sympathetic. But the only problem is that the EC is also the only party with no checkbook and hence no skin in the game. Moreover, Greece chose to ignore evidence from past negotiations and this one that the EC was slapped down by the other members of the Troika. For instance, during the Eurogroup negotiations in February, the EC’s Moscovici tried negotiating a memo with Varofakis. Varoufakis was stunned when the Eurogroup presented him with a completely different draft. Just a couple of weeks ago, the Greek paper ToVima published a proposal from the European Commission to try to force the release of funds to Greece. The EC rapidly issued a denial, and the IMF and ECB reacted angrily.
Tsipras and Varoufakis have repeatedly tried forcing discussions to the Eurogroup/member state level when they aren’t equipped to handle negotiations with Greece. Look at how hard it was to come up with a simple “shape of the table” memorandum in February. Even if via a Damascene conversion Merkel were to decide to take the negotiations away from the Troika, she’d lose the IMF’s half of the €7.2 billion that Greece is seeking. And the Eurogroup would need to figure out how to come up with a negotiating process (who are the leaders, what is their negotiating position, how do they report back) and get the negotiations completed in at the very tops two weeks. It’s just not viable. Even if they tried it would be too chaotic to work. And media reports have said the Greeks have been told that the political leaders (or presumably their key staff members) aren’t equipped to negotiate a complex deal.
Greece believes that the Eurozone creditors and ECB can’t handle the ramifications of a Greek default, and therefore they will blink. That belief would make the Tsipras op ed make more sense: he’s burning all his bridges.
Note that the view that the creditors can’t handle a Greek default (remember, a default does not imply a Grexit) is shared by quite a few commentators and financial analysts. This is a bit of a simplification, but there are two points of vulnerabilty. One is all the credit that the ECB has extended to Greece through the Target2 system, which is now over €100 billion. If the ECB has to recognize losses on the Greek exposure to Target2, they are allocated to Eurozone member states. However, it’s not at all obvious that the ECB has to recognize losses in the event of a default on the IMF. And even analyses of a worst-case scenario, that of a Eurozone breakup, have also devised ways for Germany to avoid Target2 losses.
Similarly, the Eurozone countries who have lent money to Greece have been willing to restructure debt in all sorts of ways short of writing down principal amounts. Why? Under the county accounting rules, they don’t have to recognize a loss on a restructuring if the principal amount is unchanged (maturities are extended and interest rates reduced) but do for a principal reduction. Recognizing losses and allocating them to taxpayers is a third rail issue.
So doesn’t that mean the creditors will do anything to avoid an IMF default? Not necessarily. I hope more expert readers will pipe up, but these loans don’t have the same terms as private loans. And government accounting rules aren’t the same as GAAP. So that means an IMF default may not be a loss recognition event for the countries that lent to Greece.
An indirect proof is that Tsipras called threatened to default on the IMF in May, mere days before the government decided to use the expedient of borrowing reserves in its SDR account at the IMF. As we pointed out then:
Ekathimerini stated on Sunday that Alex Tsipras sent a letter to IMF managing director Christine Lagarde on May 8 stating that Greece would not be able to make its May 12 IMF payment, and also sent the letter to the EU’s Jean-Claude Juncker and the Mario Draghi of the ECb. Tsipras also reportedly called US Treasury Secretary Jack Lew with the same information. Yet the threat of an imminent default did not lead to a breakthrough (as in a concession) from the creditors in the technical-leval talks over the weekend, to the Eurogroup relenting on its existing plan to make no decision (as in not authorize) regardling a release of funds at its May 11 meeting. or to the ECB letting up on its government funding choke chain.
Mr. Market will get sufficiently upset to pressure the Troika to relent. While spreads in periphery countries have widened a bit as the Greek drama has become more riveting, and European stock markets shuddered on Friday, this is a pale shadow of the sort of contagion and the wild stock market moves we saw in 2010 and 2012. But one way that Tsipras’ op ed makes perfect sense is to rattle investors even furthers. As former IMF staffer Peter Doyle pointed out in FT Alphaville in February:
On the one hand, in an incredible reversal of practice during the global financial crisis—when central banks were at pains to conceal which institutions were receiving their emergency assistance for fear of compounding the adverse signals and therefore the crisis—the ECB has brazenly publicized exactly which Greek banks depend on its help and how much. And it has overtly warned it would withdraw that help. In this way, the central bank is overtly threatening to blow up the Greek banking system, in order to make the euro work. Walter Bagehot, the nineteenth-century father of lenders of last resorts, would be dumbfounded.
On the other hand, Syriza would like nothing better now than to see the yields on Spanish, Portuguese, or Italian sovereign debt relative to Germany jump, signalling broader market disquiet—that Grexit may be imminent and that the rump eurozone would be badly destabilized by it—so forcing ECB retreat. So Syriza, in league with Podemos in Spain and prevailing anti-euro Italian political forces, is openly threatening to blow up its own exchange rate regime, the euro, in order to make it work. The many fathers of exchange regime credibility would be as dumbfounded as Bagehot.
As of this hour, Bloomberg reports that European stocks are “little changed” so the Le Monde article doesn’t appear to have added enough new information to raise investors’ temperatures. 7:00 AM update: Reader Scott sent a Bloomberg run of changes in spreads on Eurozone government bonds. There has been some widening on periphery bond spreads, but as Ed Harrison put it, “Not worrisome so far.”
The threat of Greece slipping into Russia’s orbit will force the creditors to relent. Greece has tried playing this card before. The US would arguably be the party the most concerned by this gambit, yet last week US Treasury Secretary Jack Lew, in pressing both sides to come to a deal, was pressing Greece much harder to make concessions than the Eurocrats. Greece is still trying to up the ante on this front. From the Telegraph:
Panagiotis Lafanzanis, the energy minister and head of Syriza’s powerful Left Platform, returns from Moscow after securing a provisional deal with Gazprom to build part of the “Turkish Stream” gas pipeline through Greece….
The Russian energy minister, Alexander Novak, said over the weekend that the project has been agreed in principle. ” We are now discussing technical details,” he said.
Greek officials have told The Telegraph that Russia is offering up to €2bn in up-front credit to sweeten the arrangement, though it will not be a state-to-state transaction.
As Mark Ames has said, “You never want to depend on Moscow for your survival. Just ask Serbia how well that worked out.”
It would be unheard of for Greece and Russia to complete a detailed agreement by the end of June. More important, Russia lacks incentives to do so. It’s always cheaper to buy out of bankruptcy than on the courthouse steps. Greece will be even more desperate if it defaults, which would give Russia more negotiating leverage. And if Greece and the Troika somehow manage to kiss and make up, Russia may be less eager to consummate this deal, and again may decide to hang tougher in the negotiations (as in it becomes less eager to consummate the agreement). So while it it not impossible for Greece to get an “up to” €2 billion advance by the end of June, I’d assign it well under 5% odds.
One thing Tsipras’ Le Monde article may have done is forestalled the Troika putting forward a deal to Greece, given that Greece apparently still has not tabled a new complete set of proposals. While they might have wanted to do it to demonstrate that they have tried every option, the op ed yet again confirms that Tsipras is not willing to budge on issues that are also red lines for the IMF and Eurogroup.
What the Troika instead might turn to is a deal to prevent a default from turning into a Grexit, say offering a package of humanitarian relief, with paying past-due pharmaceuticals suppliers as high on the list, in returns for hard commitments that Greece will not take steps consistent with a Grexit.
As Lambert said via e-mail, “The Tsipras op-ed rings true to me as futurology. Which alas is not the same as governing.”