In case you managed to miss the dramatic events of yesterday: Greece has been given a maximum of five days to come up with a proposal acceptable to its lenders. And “acceptable” would be more stringent than if it had agreed to the memorandum when Syriza assumed office in January. As Helena Smith of the Guardian writes:
Over in Athens the political opposition is demanding that party leaders reconvene for an emergency meeting to discuss the ultimatum the Greek government now faces…
Anxiety in Athens this morning is almost palpable. Among a political elite who would have played the game very differently, there is mounting concern that one wrong move and Greece will not only be headed for euro exit but years of purgatory on the periphery of Europe…
Truth is, back in Athens very few have any idea what the proposed agreement now involves. After five months of bungled handling of negotiations under Tsipras, all they know is that any deal is going to be much, much tougher than originally thought given the Greek economy’s freefall following the closure of Greek banks.
Greece was expected to submit a new set of proposals on Tuesday, but its new finance minister Euclid Tsakalotos merely read out Greece’s last proposal, so he was summarily sent packing.
The creditors view the Greek “no” vote as a rejection of a possible deal and say they already have detailed plans for a Grexit, which are likely to become even more detailed over the coming days. Ambrose Evans-Pritchard of the Telegraph reports that:
….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.
Remember that it takes unanimous approval for a new bailout or bridge program, so Germany has plenty of political cover for its aggressive stance.
As the Guardian describes, the lenders have two paths in mind. If Greece defies expectations and capitulates, um, submits a workable deal, no one actually expects it to be done on Sunday, but that both sides would have agreed to key terms:
Athens is expected to ask for a new bailout programme worth up to €60bn over two to four years as well as measures to reduce its ballooning debt.
The chances of securing a deal hinge on the levels of cuts, austerity, and fundamental reforms of economic and fiscal systems that the Greek government is prepared to endure after Tsipras stonewalled for five months and then called his snap referendum.
Merkel ruled out any flat writedowns of Greek debt, but there is likely to be scope for debt restructuring.
Eurozone officials said that if things went well, a new bailout could be ready by mid-August. In the meantime, with capital controls in place and Greek banks running out of money, Tsipras made clear his country would also need immediate “bridging” support to prevent a banking collapse that would force a return to the drachma. That would also come with tight strings attached and up-front action through the Greek parliament to persuade eurozone leaders that Tsipras was committed.
And the Guardian also describes one way to finesse the €3.5 billion payment due to the ECB on July 20:
They said that when Greece’s second bailout expired last Tuesday, €3.3bn in ECB profits from its securities markets programme due to Greece also vanished.
Ministers from the Eurogroup could decide to release the profits from 2014, which amount to €1.85bn, and top them up with an additional €1.5bn currently held by eurozone governments in order to facilitate payments due to the European Central Bank in less than a fortnight.
A eurozone source said: “It’s not an easy solution, but probably the only solution.”
The advantage for Greece would be that the money could be released without the delays caused by getting agreement through the parliaments of euro zone members. The potential downside is that the cash would need to be authorised by the Eurogroup unanimously.
The current plan is that there will be a summit on Sunday no matter what. If a deal with Greece is coming together, it will be among the leaders of the 19 Eurozone nations. But if the two sides remain at loggerheads, it will be a meeting of all 28 EU members to prepare for a Grexit.
Attentive readers may wonder why the drop dead date now appears to be July 11, when the ECB default date is July 20. The rationale, as reported in Reuters:
A crisis meeting of EU leaders on Sunday is “really the final deadline” for Greece to reach a deal with creditors or face economic collapse, ECB Governing Council member Christian Noyer said on Wednesday.
Noyer said the ECB had already interpreted its own rules “to the maximum” to help Greece and would be obliged to cut off liquidity as soon as there was no prospect of a deal.
“The Greek economy is on the verge of catastrophe, we absolutely need a deal on Sunday. It is the final deadline, afterwards it is too late,” he said.
“In the last six months we maintained the lifeline set up for Greek banks and put enormous sums of money on the table … Our rules oblige us to stop immediately at the point when there is no prospect of a political accord on a program, or at the point when the Greek banking system crumbles – which would happen if it enters generalized default on all its debts.”
The fact that Noyer is delivering this message is yet another “not good” sign. While French government officials are generally more friendly to Greece than others of the Eurozone, Noyer had made some of the most retrograde remarks about Greece of any ECB leader.
And there are still no signs that Greece is making meaningful preparations for a Grexit. For instance, it failed to seek a European Court of Justice injunction against the ECB’s failure to increase the ELA last week. Instead, Greek sources merely mentioned it to the Telegraph as a possible idea. Similarly, the Greek government denied vigorously that it was considering the mild step of issuing IOUs:
“The report is totally baseless. Such reports are directed against the country and considered dangerous at a time when negotiations with creditors partners are at a crucial point,” the finance ministry said in a statement.
This is a brutal power play, but one that was not hard to foresee. We warned that the creditors were likely to regard the referendum as a stunt too far. Yet even in referendum campaigning, Varoufakis and Tsipras told voters that there would be no tough choice, that they could hold their ground on austerity and still remain in the Eurozone. Yet Eurozone leaders told Greek voters that they would regard a “no” vote as a vote against the Euro membership. They are now stubbornly, sadistically, and recklessly delivering on their threat. And we’ve repeatedly described why the Greek governemnt’s rejection of a Grexit is based on an understanding of how disastrous the results would be. As we wrote: http://www.nakedcapitalism.com/2015/06/why-greek-banks-are-likely-to-be-toast-no-deposit-insurance.html
Mohamed El-Erain, no hysteric, placed the odds of Grexit at 85%, and gives a flavor of how deep the downside would be:
Greece is heading for a “massive economic contraction” and is likely to be forced out of the euro zone, according to Mohamed El-Erian, the former chief executive at Pacific Investment Management Co…
“What we are seeing here is what economists call the sudden stop, when the payment system stops. The logic of a sudden stop is a massive economic contraction, social unrest and it’s going to make continued membership of the euro zone very difficult for Greece….
“This is a tragic situation — we must not forget that there are Greek citizens that have already been suffering for five years,” El Erian said. “They’ve seen their living standards cut, unemployment is running at 26 percent, youth unemployment is over 50 percent and they’re about to face an even bigger depression.”
This is the biggest reason we have been so hard on the conduct of the Greek government. Varoufakis had concluded in his pre-Greek government writings that a Grexit would be a disaster for Greece. Yet his and his colleagues’ game of chicken approach to the negotiations meant that that was a very realistic outcome that they cavalierly assumed wouldn’t happen. As terrible as austerity is, a Grexit will be vastly worse, and not for six months or even a year. Aw we and others have stressed, Greece could well become a failed state, with human and social costs that would put any effort to assign mere economic damage to shame.
And now the worst case scenario for the Greek people and Europe looks like a virtual certainty. History will judge all the major actors harshly, Merkel most of all.
Update 8:00 AM: This will be short due to the hour (I’ve been up all night yet again). I hope readers will add more details in comments from other sources. From the Wall Street Journal:
Greece formally requested a three-year bailout from the eurozone’s rescue fund Wednesday and pledged to start implementing some of the overhauls demanded by creditors by early next week, according to a copy of the request seen by The Wall Street Journal.
Crucially for Greece’s creditors, the letter says the government would start implementing some measures, including on taxation and pensions, by the beginning of next week, though it doesn’t go into details.
The letter is a first step toward fulfilling a demand by international creditors, who have given Athens until Sunday to come up with tougher measures they would impose in return for desperately needed financing that could keep the country from bankruptcy and even worse economic turmoil…
Prime Minister Alexis Tsipras said earlier Wednesday that his government would present concrete and detailed overhaul measures in the coming days.
The full list of overhauls and budget cuts is what will determine whether the application for a new rescue program will be approved by the rest of the eurozone. The currency union’s leaders said Tuesday they would assess whether it makes sense to start formal negotiations on a bailout program at an emergency summit on Sunday.
Update 6:00 PM: To clarify a point that was muffed by the some financial media and therefore I picked up on their lack of precision, Greece is due to submit its detailed proposal before the beginning of business Friday (defined by Jean-Claude Juncker as 8:30 AM, presumably Brussels time), so the “Thursday” deadline includes all night. The letter submitted does not constitute a detailed proposal but is a step towards generating one.