The odds of a deal between Greece and its creditors getting done fell as Greek prime minister Alex Tsipras cancelled a Friday session to continue negotiations with the creditors and backed out of Greece’s promise to make its scheduled €300 million loan payment to the IMF. What made this reversal surprising was that Tsipras had reassured Lagarde on Thursday morning. The government reversed itself hours later, invoking a rarely-used rule that allows borrowers to bundle payments and make them in a lump sum at the end of a month.
While some may try contending that this was a clever move meant to show the Greek unhappiness with the creditors’ proposal, as Lambert said, “Most Machiavellis are a lot smoother than that.” Greece was not canceling the payment out of inability to pay per se, although it would have had to raid yet another cache intended for the Greek people, that of an EU infrastructure fund (although Ambrose Evans-Pritchard, who is close to Greek sources, reports that the use of the IMF provision was baked in, since Greece would not have been able to make its next IMF payment on June 12). But the sudden move, combined with Tsipras canceling his next session with Juncker and other creditor representatives, and heading to Athens to speak at an emergency session of Parliament (6 PM local time today, 11 AM EDT) has the look of needing to quell a party revolt. The Left Forum of Syriza was opposed to making further IMF payments and is pumping for a default and Grexit (see a translation of the proposal it made at a Central Committee meeting last month here).
Consider this account from Reuters:
As details of the confidential lenders’ proposal trickled out, members of Tsipras’ government and his Syriza party denounced the conditions as unacceptable.
The backlash highlighted the risk of a revolt in Syriza if the prime minister decides he has to accept a deal, not least because a big majority of Greeks want to stay in the euro zone.
“(Juncker) took on the dirty work and conveyed the most vulgar, most murderous, toughest plan when everyone hoped that the deal was closing,” Alexis Mitropoulos, a deputy parliament speaker and senior official within Syriza told Mega TV. “And that at a time when we were finally moving towards an agreement we all want because we rule out a rift leading to tragedy.”
Avgi, the Syriza party newspaper headlined Thursday’s edition: “A continuation of austerity? No, thanks!”.
While, as Lambert puts it, this is an overly dynamic situation, the initial reaction from Merkel, who is the one person who might be able to wrest concessions from the hardliners, was not encouraging. Tsipras spoke to her and Francois Hollande Thursday evening. She had said earlier in the day, “we’re still far from reaching a conclusion,” which does not signal much optimism.
A Bloomberg story says that the European creditors expect Greece to respond to the creditors’ proposal by June 8, and to have a deal in place by June 14. That looks wildly out of synch with conditions on the ground. Tsipras effectively rejected the proposal in the phone call to Merkel and Hollande, although the government may lodge a more formal turndown.
Other factors to bear in mind:
The Left Platform so far is succeeding in advancing its plan to have Greece default. We’ve pointed out repeatedly that the hard left wing of Syriza would check Tsipras in making concessions to the creditors. Even after issuing his Le Monde op-ed last week, which would already seem to constrain him, the Left Platform seems to be outraged that Tsipras is even talking to the creditors at all about their proposal, even if it is just a matter of form.
Snap elections appear unlikely to offer any resolution and could throw an even bigger spanner in the works. There’s some patter in the financial press that snap elections could give Tsipras a mandate, as if that would increase the odds of getting a deal done. That line of thinking is bizarre. Tsipras isn’t in favor of a Grexit (his position on a default seems to be he will do it only if he fells Greece has been forced into it) and he’s publicly kept up his position that he is not crossing any red lines. He can’t retreat from that even if he were inclined to. Having voters revalidate Tsipras’ increasingly irreconcilable promises, of rejecting the structural reforms and staying in the Eurozone, does not make them more viable (note that while a default does not necessarily mean a Grexit, it does put Greece on a path of hard-to-control events that could make a Grexit inevitable).
to be blunt about it, Greek voters overestimate how much their view matter. As Philip Stevens of the Financial Times put it:
Another miscalculation (or was it hubris?) was to assume that other European states should be bound by the choice made by Greek voters. Mr Tsipras was given a mandate to seek what he said was a better deal. No one should have expected that the voters of Madrid and Lisbon or Dublin and Berlin would feel an obligation to agree. Greece’s democratic choice does not trump those of other eurozone states.
As the Socialist Worker concluded before the latest intra-party row:
Although the Left Platform’s proposal was defeated by a 95-to-75 vote, the strong showing by the left has put enormous pressure on Prime Minister Alexis Tsipras. If he bows to the latest attacks from Europe, he risks splitting the party. And if he were to follow the increasingly shrill calls from the establishment media and attempt to expel the left from SYRIZA, he would likewise detonate a crisis.
The outcome would likely be either new elections or the expansion of SYRIZA’s governing coalition to include pro-austerity parties such as Potami.
Moreover, now that the Left Platform has put pressure on Tsipras, things could quickly move out of the Prime Minister’s control. For instance, if the Left Platform is not satisfied with Tsipras’ speech tonight, they may go into open rebellion and call for a vote of no confidence. The odds favor it failing. As the old political saying goes, when your enemy is drowning, throw him an anvil. New Democracy and Pasok would probably prefer that Syriza own fully whatever the outcome of the negotiations is, or at least be the clear lead actor. If the Left Platform threatens to leave Syriza to from a new party, the rest of Syriza would be forced to seek new coalition partners. Nevertheless, even facing a vote of no confidence would make it clear to the creditors that even if Tsipras stays in power, it becomes harder for him to pass any legislation that would come out of a deal, unless the creditors capitulate on structural reforms or popular opinion changes in Greece.
Greece is about to enter the creditor sweatbox. Despite all the conditions above seeming to argue that the creditors can’t push Greece around much, the cost of defiance is about to start rising rapidly. From ekathimerini:
Sources indicated that even if Greece were not to honor its repayments to the IMF this month, it would still have insufficient funds to pay salaries and pensions through June.
Issuing payment in scrip will almost certainly dent the ruling coalition’s popularity, particularly since Syriza’s base includes civil servants. Moreover, the Greek-sympathetic Ambrose Evans-Pritchard noted that Greece might have to impose capital controls as early as this weekend. Australia had already issued a travel advisory on Greece that “retail banking services throughout Greece may at times become very limited at short notice.”
The fear of imposition of capital controls will lead exporters to Greece to limit shipments and tighten up even more on payment terms. It’s also a negative for travel. In the 2010 and 2012 crises, berths in cruises that had Greek ports of call were virtually being given away. And this is the beginning of the tourist season, which is important for the economy overall and even more so for tax receipts. So this type of uncertainty could not be happening at a worse time.
An IMF default isn’t a bright white line, but nevertheless would set in motion a new chain of events. The situation would be so unprecedented that it isn’t clear what the decay path would be. But the ECB will come under increasing pressure to limit its exposures, which would force either a Cyprus-style depositor bail-in or a Grexit. Key points from a very good overview at the Telegraph:
…in the event of a delayed repayment, according to IMF protocol, Greece would be afforded a 30-day grace period, during which it would be urged to pay back the money as soon as possible, and before Ms Lagarde notifies her executive board of the late payment.
Following this hiatus, a technical default could be declared a month later, when “a complaint regarding the member’s overdue obligations is issued by the Managing Director to the Executive Board”….
Should no money be forthcoming however, the arrears process may well extend indefinitely.
Greece’s other creditor burden would also start piling up, with the government due to pay another €6.6bn to the European Central Bank in July and August.
Although the exact process is uncertain, falling into a protracted arrears procedure could have major consequences for continued financial assistance from Greece’s other creditors – the European Central Bank and European Commission…
“If Greece defaults to the IMF, then they are considered to be in default to the rest of the eurozone,” says Raoul Ruparel, head of economic research at Open Europe.
The terms of Greece’s existing bail-out programme stipulate that a default to the IMF would automatically constitute a default on the country’s European rescue loans.
As I parse this, the “delayed payment” refers to the bundling and delay till the end of June. And to add to the murkiness, even though this column says there is a 30 day grace period, finance minister Yanis Varoufakis asked for them in April, and Lagarde herself said Greece would not get one. So unless she reverses herself, if Greece does not reach a deal by the end of June, Lagarde would submit the complaint to the board a month later. It would become harder to deny that what has happened is a default as of then, despite it being formally called an arrears procedure.
The expiration of the bailout at the end of June is another constraint. In theory, the “bailout period” could be extended beyond its drop dead date of June 30. Given the nebulous nature of an IMF default, that would in theory allow everyone more negotiating runway. However, that would take the approval of all the Eurogroup members and for some, including Finland and Germany, that entails parliamentary approvals. A large number of countries, mainly the good austerity students like Latvia, Portugal, Spain, and Ireland, are even more hardline than Germany. Softening public opinion enough to get the votes through would require that the messaging were already underway. Merkel will not be able to decide what action to take until (at a minimum) after Tsipras’ speech and after she has conferred with Draghi, Hollande, Juncker, perhaps Djisselbloem, and Lagarde. Even then the creditors will have to decide what course of action to take, given that Greece seems committed to not budging. This snippet from a Reuters story, which came from the Greek side, was telling:
In a sign of accelerating efforts to bridge the remaining differences, Tsipras, Merkel and French President Francois Hollande spoke late on Thursday evening via conference call, according to a Greek government official.
Tsipras told the two leaders that the lenders’ proposal could not be a basis for a deal because it was not taking into account the progress made in talks in Brussels over the past months, the official said adding that there was optimism that a deal could be reached soon.
Given that the two sides have remained far apart, it sounds like a stretch to insinuate that the creditors were retreating from positions they’d taken in the talks. (It is completely fair to note that the primary surplus targets that the creditors put forward for 2016 and 2017 are insane, but it’s not clear that either side had previously put a hard figure on the table for those periods).
The creditors actually made a large concession:
In one concession, the lenders were offering to unlock 10.9 billion euros in unused bank bailout funds that would enable Greece to cover its financial needs through July and August, an amount that is more than the 7.2 billion euros left in the expiring bailout.
The Roshomon-like difference in views as to what has happened is also not going to help Merkel and Juncker sell an extension to the Eurogroup members, assuming Merkel decides to go down that path.
The ECB is likely to prefer a faster resolution if they can keep their hands clean. The ECB is very concerned about its ability to contain market reactions, and protracted negotiations work against that. The almost certain continuation and acceleration of the bank run will also make it impossible for the ECB to wait very long.
If I were the creditors, I’d start thinking very hard about what combination of sticks and carrots it can deploy to keep Greece from exiting the Eurozone in the case of a default, which is now looking hard for even Merkel to forestall. Stay tuned.