Ambrose Evans-Pritchard of the Telegraph has a bombshell new report on Greece. It’s even more devastating when you keep in mind that Evans-Pritchard has been a staunch Syriza supporter and has spoken regularly to government officials, including Yanis Varoufakis, who is a source for this story.
The subhead says it all:
Prime Minister Alexis Tsipras never expected to win Sunday’s referendum. He is now trapped and hurtling towards Grexit
The story explains, as we reported at the time, that Syriza had finally agreed to cross its red lines. It had offered a plan that would meet it draconian austerity targets of 1% primary surplus this year, rising to 3.5% in 2018. Greece offered what amounted to a pension cut of 0.4% of GDP by tightening up on early retirement and by increasing health care payments on retirees, which is a de facto pension cut, and committed to a total pension cut of 1.0% of GDP the following.
Rather than accept the Syriza offer and only ask for changes at the margin, they maintained that the numbers still did not work and pressed for the 1% pension cut immediately as well as an increase in VAT at hotels from its current effective level of 7% to 23%. They also refused to budge on wanting to impose labor market “reforms”.
Key sections of the Telegraph story:
Greek premier Alexis Tsipras never expected to win Sunday’s referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control.
He called the snap vote with the expectation – and intention – of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 “ultimatum” and suffer the opprobrium….
Mr Tsipras is now trapped by his success. “The referendum has its own dynamic. People will revolt if he comes back from Brussels with a shoddy compromise,” said Costas Lapavitsas, a Syriza MP.
“Tsipras doesn’t want to take the path of Grexit, but I think he realizes that this is now what lies straight ahead of him,” he said.
What should have been a celebration on Sunday night turned into a wake. Mr Tsipras was depressed, dissecting all the errors that Syriza has made since taking power in January, talking into the early hours…
Syriza has been in utter disarray for 36 hours. On Tuesday, the Greek side turned up for a make-or-break summit in Brussels with no plans at all, even though Germany and its allies warned them at the outset that this is their last chance to avert ejection.
The new finance minister, Euclid Tsakalotos, vaguely offered to come up with something by Wednesday, almost certainly a rejigged version of plans that the creditors have already rejected.
Events are now spinning out of control. The banks remain shut. The ECB has maintained its liquidity freeze, and through its inaction is asphyxiating the banking system.
Factories are shutting down across the country as stocks of raw materials run out and containers full of vitally-needed imports clog up Greek ports. Companies cannot pay their suppliers because external transfers are blocked. Private scrip currencies are starting to appear as firms retreat to semi-barter outside the banking system.
This picture is consistent with the puzzling development we flagged: that of Syriza forming a de facto coalition with all parties save Golden Dawn for the purpose of the negotiations. Why would Syriza, which won a decisive, incontrovertible victory, feel the need to ally with parties that had pumped for a “Yes” vote like To Potami and New Democracy?
Evans-Pritchard stresses that the Eurozone is in similar disarray: Leaders of the creditor nations had said before the vote that a “No” meant Greece was signing up for a Eurozone exit. Even though European Commission chief Jean-Claude Junkcer is urging European officials to put their egos aside, they too appear to have whipped up their voters and MPs to such a high level of hostility against Greece that it’s not clear that they could back down even if they want to (and mind you, I don’t think there are many that want to). Put it another way, when Juncker is the sanest guy in the room, you know it’s bad.
Evans-Pritchard says the French and the US are trying to throttle back the hardliners, and Italy is on board too. But any bailout would require approval of all 19 Eurozone members. We’ve said before that Merkel didn’t have the votes for an extension, although she might be able to muster them if Greece capitualtes. But that was before the referendum. The new theme in the German press has been that the Greek loans are a total loss and the Eurozone would be better off if Greece were gone. And with an ECB default date of July 20, in theory there is very little time to turn sentiment around. In practice. there is €10.9 billion held by the ECB that Greece has been seeking to have released; if a deal really were nigh, the ECB might be persuaded to apply or borrow against that amount to make the €3.5 billion payment due July 20. But that assumes a real desire to get a deal with Greece done, and right now, that sentiment hasn’t jelled. Again from Ambrose Evans-Pritchard:
Yet 15 of the 18 governments now sitting in judgment on Greece either back Germany’s uncompromising stand, or are leaning towards Grexit in one form or another. The Germans are already thinking beyond Grexit, discussing plans for humanitarian aide and balance of payments support for the drachma.
Mark Rutte, the Dutch premier, spoke for many in insisting that the eurozone must uphold discipline, whatever the financial consequences. “I am at the table here today to ensure that the integrity, the cohesion, the underlying principles of the single currency are protected. It is up to the Greek government to come up with far-reaching proposals. If they don’t do that, then I think it will be over quickly,” he said.
The article outlines a Grexit plan that was discussed at an emergency session a week prior. It would consist of seizing the Bank of Greece so that the government could get its hands on €17 billion of reserves, imposition of a haircut on €27 billion of Greek government bonds held by the ECB, issuing IOU to recapitalize the banks, and appealing to the European Court of Justice that Greece’s rights as a Eurozone member had been violated (particularly with respect to liquidity provision).
This is far too late to be planning for a Grexit, and this level of planning is well short of the sort of war-level mobilization of resources that needs to happen. Worse, by letting these plans be reported in the media, the Greek government loses any element of surprise. For instance, the ECB has now had over a week notice that the Bank of Greece might be “requisitioned”. Do you think they haven’t taken preparatory countermoves?
If the two sides are unable to pull out of their current trajectories, the end game looks to be a Grexit and a Greece not free but dependent on its creditors for key imports like food (Greece is not self sufficient in food), petroleum and pharmaceuticals. And this will do huge damage to the fabric of Europe, both in the cost of a downdraft of a Grexit and the creation of processes to allow for nations to depart, which ones big enough to do so and come out ahead or not suffer very much, like France and Italy, may eventually use themselves.
Update 8:20 PM: The Greek banks will not last beyond the weekend which basically means the Greek government has until Sunday to capitulate, um, come to a deal. From the Financial Times:
Mario Draghi, the European Central Bank president, briefed the summit on the situation for Greek banks, indicating that they could survive to the end of the week but not much longer. He also signalled that emergency central bank loans keeping the banks alive, which the ECB must approve, could not be extended beyond the weekend.