Silly me! I thought that given that the Greek government had prostrated itself and had complied with the creditor demand to pass legislation double-plus-quick or else, that the worst of the hurdles to getting the third bailout passed had been surmounted.
I should know better than to let any optimism cloud my view as far as Greece is concerned. And I have to confess it was out of a hope that Greece would not longer be front page news pretty much every day.
We are again in the midst of what Lambert calls an “overly dynamic situation” with respect to the Greek negotiations. And it’s going to be a bit in flux because the parties are again fighting over process, or what is often called “shape of the table”. That’s already a bad sign, since it has the potential to create rancor even before the two sides get to working out substantive issues. And it’s not as if the parties to these talks harbor much in the way of good will toward each other to begin with.
So rather than do anything in depth, let’s just flag some key issues:
The row over the IMF debt reduction seems overdone. That isn’t to say this issue doesn’t have to be negotiated, but the IMF’s noise level has come to have a “the lady doth protest too much” quality to it. Lagarde has already conceded on the issue that had the potential to be a dealbreaker, that of insisting on a haircuts (reductions in the face amount of debt) versus other forms of relief. Merkel has agreed that there will be debt relief. So the IMF and the Eurozone lenders just need to duke it out. Extending maturities massively is not costly to national lenders politically, nor is further interest rate reductions or deferrals (the impact won’t be felt for years, and then only gradually). And the IMF can make any set of numbers work via its choice of unrealistic growth assumption (as in any positive number under austerity is by definition wrong….). So this component of the negotiations is not a big source of risk.
The IMF has raised the bar by taking its funding left in the old bailout off the table. This is a key point that appears to have not been widely recognized. From the Financial Times on Friday evening, emphasis ours:
Adding another potential complication, the Greek government on Friday lodged a formal request with the IMF to begin discussions on a new, third bailout programme. The request came after officials at the IMF determined that the current Greek programme, which still has about €16.5bn to disburse and was due to expire in March, had become outdated.
Those negotiations between Athens and the IMF could take months. But the decision to pursue a new IMF programme means eurozone leaders may have to open talks on granting Greece significant debt relief much earlier than originally anticipated, since the IMF will not sign on to a new programme unless eurozone lenders agree to restructure their bailout loans.
That could lead to political difficulties in Germany, which has fiercely resisted writedowns to levels the IMF has been demanding.
It also means Germany’s Bundestag is likely to be forced to sign off on a new eurozone bailout for Greece as soon as next month without the IMF’s own component being in place — something German officials have insisted was necessary to win approval from wavering centre-right MPs.
The “as soon as next month” deadline is the €3.2 billion ECB bond payment due August 20. Greece and its creditors are pushing to complete negotiations by the 18th. But here is where a major “shape of the table” issue appears to be in play:
The creditors want more reforms passed before they hand out more money. From their point of view, the rash of legislation passed over the last two weeks was just to give Greece its €7 billion of bridge finance, which went for an ECB payment due July 20 and IMF arrearages, repayment of the borrowing from the Greece’s reserve account, and a small new payment due. From today’s Financial Times:
….there remain deep differences on the way forward that could still derail negotiations before an August 20 deadline.
The most contentious issue, according to officials involved in the talks, is whether Athens will need to implement additional reform measures to receive quick aid under the bailout programme.
Creditors have insisted the two rounds of reforms passed by the Greek parliament this month were prerequisites to getting the talks started. They also served as the conditions for a €7bn bridging loan from the EU that prevented Athens from defaulting on a bond owed last week to the European Central Bank.
They insist that Greek authorities will have to legislate for more reforms — known as “prior actions”, because these must be passed before aid is disbursed — to gain any payments under a new three-year bailout programme.
Athens is resisting any additional reform measures, officials said, arguing the measures already passed should be all that is required for the first tranche of aid.
“This, at present, is the big, fat, issue,” said one official involved in the talks. “They do not want to understand that there will be yet another significant package of ‘prior actions’ before any disbursement. They already have implementation fatigue after two mini-bills.”
I hate to say it, but based on the media coverage, I had heard the creditors saying pretty clearly that they expected reforms to be passed before any “third bailout” funds were disbursed. However, and perhaps incorrectly, I had assumed that the IMF money in the old program (the €16.5 billion in its old program) could tide Greece over while it was negotiating the third bailout. But the IMF has made that go “poof” by saying its data on Greece is so stale that it can’t lend out the funds it has authorized.
This is either the IMF being a prudent lender, or playing a very ruthless game with both Greece and the Eurozone. I’d bet on the latter. The IMF Is not happy being made Greece’s gaoler by Germany. At a minimum, if it is going to play that game, it will play it on its own terms. And the IMF or its clever infighters (Lagarde? or the famously kneecapping European program team?) may have decided to push both Germany and Greece on issues where it has not gotten satisfaction to date. That thus could blow up the effort to get at a deal while leaving the IMF with clean hands. For instance:
The IMF and Greece are again at loggerheads about the IMF getting access to information. Recall that the protracted fight between Greece and its lenders was also in very large measure about process. Greece wanted debt reduction discussions to be included in getting the last part of its “second bailout” money from the Eurozone lenders. Varoufakis and Tsipras were also trying to circumvent negotiating reforms with the Troika and wanted to deal with Eurozone officials. They were told no repeatedly, and the lenders were not surprisingly annoyed with the persistent efforts, since both those issues had been put to bed in the memorandum Greece signed with the Eurogroup on February 20 (and separately, it’s a big violation of negotiating protocol: you don’t reopen settled points save by paying a major price for the concession, unless you grovel convincingly and the other side is in a charitable mood).
Greece’s stymieing of the IMF is looking increasingly like an effort to withhold data. Since Greece has a long history, going back to 2004, of faking its budget numbers. And the monthly budget releases from March onward have looked a bit too good to be true. The government last week tried to relegate IMF officials to a hotels way out in the boonies rather than letting them stay in the Hilton near the ministries, arguing they had security concerns. Huh? It’s easier to secure a facility near the central square where the government presumably already has police in good numbers, while further out it would be more difficult and costly to maintain a similar level of manning and backup. And how safe it is to have IMF officials taking long rides to and from every day?
Put it another way, the fact that government officials are having to issue denials means that yours truly is far from the only person having similar questions. From Greek Reporter:
“The reasons for the delay are neither political nor diplomatic ones,” an official said, adding that “negotiations are going as planned.”
The official, who spoke on condition of anonymity, denied that the Greek government is trying to keep the creditors’ team away from government departments.
“We do not have any problem with them visiting the General Accounting Office,” the official said.
Asked if the government would now allow the institutions’ chiefs to visit Athens for talks on a new loan, State Minister Alekos Flabouraris said: “If the agreement says that they should visit a Ministry, we have to accept that.”
Ahem, this is evasive. The IMF has basically repudiated the old second bailout facility. That could be used to argue that there is no agreement in place. But the IMF position is that if they can’t get what they need, they won’t sign off on a new loan.
And there are some ministries to which the IMF does not yet have access. From the Financial Times today:
Despite the decision to send negotiators back to Athens, officials said there were still differences over venues and access to staff and ministries. The health and labour ministries are resisting opening themselves to bailout monitors, although the government accounting office — which tracks all national accounts and is seen as a crucial source of reliable figures on the state of Greece’s finances — will now be accessible.
And the Greek central bank seems to be poking a hole in the “can’t have the IMF too centrally located” excuse:
Because of differences over the venue for talks, the Greek central bank, which is a short walk from the finance ministry and other government buildings near central Syntagma Square, has offered to host negotiations if logistical issues cannot be ironed out.
Schabule is taking a firmer position, which does not bode well for resolving differences. As we noted from close to the outset, Schauble is a key to getting German approval of any deal. He had to whip to get the February Eurogroup memo passed. The German MPs trust him more than Merkel on the issue of Greece. And one astute observer, former IMF staffer Peter Doyle, pointed out that Schauble had on past issues made more concessions to Merkel than he likes, such as on QE. Doyle warned that if Schauble were to resign, it would cause a crisis in Germany and could even end Merkel’s chancellorship. As we’ve discussed, there have been regular reports in the German press of a rift between Schauble and Merkel over Greece. And Merkel has moved towards Schaubles’ hard-line position over time. We’ve separately pointed out that chaotic situation work in favor of parties who have clear and simple ideas of what to do, and in this case, it would favor the retrograde elements we’ve called the ultras.
Schauble has now armed his nuclear weapon. He’s mentioned the possibility of resignation. From DW:
In an interview published in this week’s edition of the German magazine “Der Spiegel,” Schäuble made it clear that although he was not currently considering resigning, he had a duty to his role and his principles.
“Politicians’ responsibilities come from the offices they hold. Nobody can coerce them. If anyone were to try, I could go to the president and ask to be relieved of my duties,” the 72-year-old told the magazine.
Asked whether Schäuble had plans to resign, a spokesman for the Finance Ministry referred to the same question in the “Der Spiegel” interview where Schäuble said: “No. Where did you get that idea?”
Schauble knows exactly what he is doing. You don’t mention resigning casually.
And circumstances may be moving into terrain where Schauble might deem extreme actions to be justified. From the Financial Times:
Officials had hoped to finish an agreement by August 11, when a meeting of eurozone finance ministers has been tentatively scheduled to approve a bailout programme. The quick pace is intended to get a deal in place before Athens owes another €3.2bn on a bond held by the ECB on August 20.
But officials said the differences remained so significant that they could require the EU to agree another €5bn bridging loan so that talks could continue into the autumn. In addition to the €3.2bn needed for the ECB bond, officials said about €500m is needed for interest payments and a small loan repayment to the IMF. The remaining cash would be used to meet government wage and pension payments./blockquote>
This probably seems more anodyne than it is. One of Germany’s boundary conditions has been that it will lend only if the IMF is in. But it does not seem likely that either Greece will agree to more reforms or that the IMF will be done with its assessment by August 11, or even before the August 20 ECB payment date. Conservative German MPs will buck approving more lending under without both IMF support and more reforms approved. If Schauble supports their rebellion, either overtly or simply by failing to voice approval for more financing, Greece could wind up defaulting to the ECB on August 20. Most experts think that would mean not just no ELA increase, but a termination of ELA support, which would lead to a collapse of the Greek banking system and a need to convert to drachma in an effort to recapitalize the banks on an emergency basis. To put it bluntly, we’d expect that to be an unimaginable disaster.
To put it another way: how many times can France intervene to keep Greece sort of in the fold? The last effort was touch and go and barely got done. Maybe Hollande has a magic touch. If so, it looks like he may be called on to use it awfully soon.