Grexit Risk May Be Back Sooner Than You Think

Even though the talk of Grexit has receded from the headlines due to the Troika’s apparent success in reducing Greece to a vassal state, that operation is in fact not complete. Both unresolved elements of the seemingly permanent bailout negotiations, and a new set of confrontations created by the refugee crisis, means that the Greeks and their putative masters may be at loggerheads sooner rather than later.

As an article in Politico describes, Greece and its creditors are still at odds over a key point in the funding talks: that of Greece’s supposedly lavish pension system. What the European press has conveniently failed to report is that Greece lacks most elements of the sort of social safety nets that other European countries have, such as disability insurance, and the pensions have wound up serving as one-stop shopping. The IMF actually appeared to appreciate the point, since in the later stages of the seemingly endless negotiations of early 2015, the agency put forward a proposal that would require Greece to create some proper social support programs as it cut pensions.

Here is the current state of play, per Politico:

Greece’s creditors are heading to Athens this week to discuss Greece’s first review under the third bailout program.

As has been the case many times before in Greece, this review should already have been completed and the funds released.

The main sticking point is pension reform. The third bailout program calls for pension cost savings of 1 percent of GDP in 2016. The government has implemented measures achieving two thirds of that the target so far, leaving a gap of roughly €600 million.

Syriza’s plans to make up the gap include higher contributions from farmers and the self-employed, an unpopular proposal that has led to widespread protests across the country. Considering that, according to the Small Enterprises’ Institute, more than 50 percent of Greek households relied on pensions as their main source of income in 2015, it’s no wonder pension cuts are a particularly toxic issue in Greek politics.

The Syriza-led coalition has only a three-seat majority, so its hold on power is fragile. The creditors don’t appear to think they are much at risk if they break the current government. The new head of the center-right New Democracy party, Kyriakos Mitsotakis, is the presumed replacement for Alex Tsipras, and the lenders anticipate he’ll be more pliant. But how does this logic hold together if the reason for new elections is opposition to pension cuts? It’s not obvious how this favors the formation of a coalition that would be softer on this issue. Yet the reading in Politico is that the IMF, which earlier had made noises that it would either require the creditors to provide real debt relief to Greece or it would not participate in the upcoming round of rescues, has now relented in the face of creditor refusal to provide much relief. That means the IMF has returned to its traditional role of kneecap-breaker.

The new fault line that has opened up is over the flood of refugees into Europe, and a high proportion transit through Greece. Greece is being charged with failure to stop the influx. Again from the article:

The hard deadline for agreeing the first review and releasing funds for Greece is when Greece runs out of money and cannot afford a debt repayment. This will come in July, when Greece has over €3.5 billion in debt to roll over.

But by late July, Greece could be a fundamentally different country. The flow of refugees from the Middle East slowed from over 200,000 in October 2015 to over 50,000 in January 2016 but is likely to pick up again as the weather improves. Other EU countries have complained that Greece is not following the rules on setting up hotspots and registering refugees that come across the Aegean via raft from Turkey.

The German chancellor’s open-armed welcome to refugees arriving in Europe, over 1 million of whom came to Germany, was called into question by the mass sexual assault in Cologne on New Year’s Eve in which most of the suspects were asylum seekers. With her popularity dwindling and an upcoming general election in Germany in 2017, Merkel is looking for ways to stem the flow of refugees.

Rather than reintroducing Germany’s national borders, a more politically appealing option for Merkel would be to outsource border closures to Macedonia and Bulgaria, stranding a number of asylum seekers in Greece.

Redrawing the Schengen boundaries to exclude Greece would deal a major blow to the country’s relations with the EU. If Greece fails to fulfill its commitments to protect its borders and establish hotspots for refugees, goodwill among creditors to find agreement on the bailout negotiation in July will in short supply.

This is even more disingenuous than it seems. Greece has an insanely long coast and land borders in underpopulated areas. Please tell us when to expect the German Navy to assist Greece in repelling refugees.

The “hotspot” label is an astonishingly dishonest term for open air prison camps. You can imagine why Greece is not keen to become a gaoler unless it is compensated very well for taking on that nasty role. But per the discussion above, no such rewards appear to be planned. In fact, the Troika seems to think it has the whip hand and can force Greece into compliance.

It’s effectively being made the whipping boy for problems that are ultimately American but more immediately Turkish in origin. Turkey is refusing to stop the refugee flow in part because that would be work, but in part because that gives the government a very powerful bargaining chip with the Europeans and the US. But since Turkey is playing footsie with Russia too, persuading it to reduce the flow of migrants isn’t as high on the horse trading list as one would think it ought to be. But you can see the logic from the discussion above: the Eurocrats think it’s easier to get Greece to do their dirty work than cut a deal with Turkey, which even if Turkey complied, would probably only reduce rather than stop the problem.

As the article concludes:

And among Greeks, anti-EU sentiment is likely to grow as the country is forced to handle the brunt of a refugee crisis not of its own making and without sufficient financial and political support from the rest of Europe…

As Greece faces a financing crunch in July, it will also likely see the influx of refugees hit fever pitch. In the absence of a coherent and effective European migration policy before July, it’s hard to imagine Greece avoiding expulsion from Schengen — and with the new line for Europe drawn at Greece’s northern borders, Greece will be one step closer to being out of the European project.

Last summer, Schäuble suggested Greece take a temporary break from the eurozone, and relations between Germany and Greece have only deteriorated since. It is likely Schäuble will put his proposal back on the table this summer. Greece’s fate may ultimately be determined by how much solidarity there really is in Europe — in which case, the future looks grim.

Shorter: expect a hot and nasty summer.

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  1. timotheus

    After years of penury and official unemployment at 25%, the Greeks should now buckle down and handle a flood of refugees with no additional cash (while Turkey gets $3 billion based on promises)? Sure, that makes sense. The “lazy Greeks” rhetoric used to peddle austerity now returns to bike Merkel in the hindparts and by extension the entire EU.

    1. fajensen

      Merkel is completely clueless, IMO. There will be much whining and whinging when CDU is replaced by AfD in the elections – this will be entirely because of Merkels stupidity.

    2. templar555510

      There has been some talk that Merkel is on the verge of a complete breakdown. If that happens she might come face to face with reality . Wow wouldn’t that be worth seeing.

      1. ballard

        My own view (and that’s all it is) – is that global elites (either from Goldman Sachs or the heart of the American Deep State) have the dirt on Merkel and are using it to control her.

        In October, 2010, Merkel stated publicly that multiculturalism ‘had utterly failed’, and that the whole concept whereby “different cultures live side-by-side simply does not work”.

        So unless she’s being blackmailed, it’s hard to see any logical reason for Merkel to enforce a policy that she herself admitted doesn’t work.

        1. James Levy

          Well, she and the other big shots in Europe either can’t or won’t buck the US on Syria, Iraq, and Afghanistan, the places the refugees are coming from. The need is to close down the pipeline at the source by ending the wars and reestablishing powerful sovereign states that can control their own borders and their own populations. America won’t have that, so Britain, France, and Germany have to sell the refugees to their respective populations and the lesser states of Europe. The only real alternative is to throw in with the Russians and broker deals in those countries over America’s head. I might like to see them try, but I think it’s politically, militarily, financially and above all psychologically impossible for them to do it. They lack the courage, will, and imagination to even try (and you know Cameron would get cold feet and sell them out a la Suez if it came to that).

    3. Cugel

      When I read last May in the German press that Schäuble’s real goal was to break up the EU, kick out the southern EU countries and replace it with a Northern European federation dominated by Germany with a “real finance minister with real powers” I assumed that Grexit was inevitable. The capitulation by Greece seems to have stymied him for the short term, but the end game is certain. The refugee crisis is just the symptom of the disease. Either the EU must restore real economic democracy which currently seems impossible, or else it must break up into tiny islands of the saved. The rest is simply triage.

      1. alex morfesis

        god bless schauble…I hope he gets his wish…and learns to speak better russian…Italy and Spain equal GDP of meindummkopfland and have better weather…France can keep its Vichy panties on and kiss up to mother russia, especially with the right wingerz taking Raz-putangs money…by the way…ever notice that purported photo of Raz Putin on his mommas lap…her right arm looks awful long…could they have not just reduced baby raz and not have to stretch the arm in the photo montage ?? although poland may not be too happy, but that oder neisse line…to the victor go the history books…please wolfie…leave the warm weather lazy ones to their own demise…oh wait…those darn derivatives that alliance and DB have tied up into themselves…darn it…I was thinking how wonderful it would be to watch wolfie turn grey from the miscalculation of what would happen with the new DM and those 125 working tanks that german war machine has to hold off Mr Raz-putin and his invading natashas…

  2. windsock

    And this is reason 1 why I shall vote in Britain’s EU referendum to leave. The EU has shown itself to be clueless and undemocratic and thoroughly in hock to financial interests. Social policies are sops and a sideshow.

    There are additional reasons but this is neither the time nor place to air them.

  3. Larry

    What does the EU expect Greece to do with regards to immigrants without any support? And what do the Eurocrats think will happen is Greece is put on a “timeout” from the EU? I’m sure an even less stable society will surely handle the flow of immigrants to the other EU countries. Then again, maybe Merkel is setting up a straw man for how she got tough on immigration for election season and can blame the dreaded southern Europeans for a increased immigration. Considering that we read on NC how elites support mass immigration into northern Europe to undermine labor strength, this is likely the more reasonable option.

  4. Daniel

    There will be no Brexit or Grexit or whatever-exit you want! The EU politicians don’t have the balls to take such a decision! End of story!

    1. Yves Smith Post author

      The headline says “Grexit risk” as opposed to Grexit. However, you seem to forget that we really did almost have a Grexit the last time around, and it was only the extreme efforts of France when negotiations were breaking down (during IIRC a 22 hour marathon) that kept it from happening. So the fact that it was only narrowly averted last time says it is entirely possible.

      Schauble has been pushing for the idea of a “managed Grexit” for years. And the combo plate of pension cuts and running open air prisons is stunningly unreasonable. Of course, the ECB can again shut down the Greek banking system, but this time the Greeks have a counter threat: they’ll send the refugees onward. If the government was really smart, they’d let Golden Dawn do the dirty work and maintain plausible deniability.

      1. JohnnyGL

        Schauble and the other EU bureaucrats will likely suggest suspending Schengen. It’s one more step toward easing Greece out of the EU. They’re going to get their wish….it’s a matter of how soon and the shape it takes getting there.

        Any chance Syriza is finally working on backup plans? Plan B? Anyone?

      2. Daniel

        For the last four yrs the risk of Grexit is upon us but nothing happens. The economy laws have been suspended and they just kick the can down the road. And believe me, it is a very long road. The Greeks doesn’t have any counter threat – this is just wishful thinking – the Greek government is just a puppet and they like being a puppet – because it is somebody else fault not theirs! After war-by-proxies there is now, in Greece, governing-by-proxies. And is good business!

        1. washunate

          That’s the thing. It’s not the EU politicians. It’s the Greek politicians. The Germans can’t push Grexit in the face of American resistance (important to keep in mind the ultimate player is NATO lurking in the shadows of creating instability throughout the near east) because the Greek political structure has to want to go their own way. And they don’t. They rather like blaming the problems of oligarchy on the Germans rather than their own mismanagement. Greece has been pegging its currency to the euro system for two decades now, and no Greek politician in a position of power has actually done something to advocate a return to freely floating exchange rates (including Syriza officials like Varoufakis and Tsipras who repeatedly emphasized their desire to remain).

          But similarly, Greece really doesn’t have any threats* it can make within the eurozone, either, because the Germans don’t care if they leave (at this juncture, we might reasonably hypothesize that the Germans would actually prefer a request from Greece for help leaving EMU…). Grexit can be announced any time. But it’s a low probability event unless major change happens within domestic Greek political economy.

          *of course, Greek politicians could renounce fraudulent debt. However, that’s not really an attack on Berlin, Paris, or Brussels; that’s mostly an attack on DC, NY, and London.

        2. Yves Smith Post author

          You are just sticking your fingers in your ears and yelling “nyah, nyah, nyah.” The last time the negotiations broke down and it was ONLY arm twisting by Hollande that got everyone back to the table. So the idea that the pols won’t go for a Grexit is utterly false. Everyone in the room was ready to, and in fact had pulled the trigger but Hollande got them to walk balk.

          The human dynamics of these negotiations have tended to get worse over time. And Germany wants contradictory things: to keep running trade surpluses in the Eurozone and not fund its trade partners. The German demonization of Greece means that German pols have backed themselves into a corner. And they are now demonizing Greece on a new front, for the refugee influx. Something will break. There is no will on behalf of Germany to move to greater integration, which is the only way out because that will reduce its power. I have a post to run today on the banking “union” and the policy there is a train wreck waiting to happen.

  5. HoarseWhisperer

    Greek farmers have blocked the major road coming into Greece from Bulgaria. Nothing coming into the country across the border. About 10 miles of backup and growing on the Bulgarian side.

    These is per the Bulgarian press. It does not take much to block a highway – as long as the authorities do not have the will to deal firmly withe protest.

    This situation – in my view – is a harbinger of what is to come. The notion of central authority relies that the minions will do as they are bid.

    The Northern border of Greece is very far from Athens and it does not much matter who the EU thinks is in control in the capital – the center will not hold much longer.

  6. Praedor

    Greece now has a weapon to wield. They should DEMAND actual debt relief or they completely open the floodgates and shuffle true hoards of refugees into EU.

  7. Jim Haygood

    Just before Bailout III, Greece’s debt was 177% of GDP. Strangely, no post-Bailout III figures seem to be available. But presumably, Greece’s indebtedness is approaching 200% of GDP now.

    Therefore, Bailout III will fail, just as Bailouts I and II did. Bailout III is a euro-fudge(TM) crafted to kick the can a couple of years down the road, to the next default.

  8. ballard

    Goldman Sachs says: “Welcome Refugees!”

    Who is really applying the pressure for this massive migration into Europe and reorganization of peoples?

    It’s not all about Merkel. Consider statements by Peter Sutherland, formerly of Goldman Sachs, and now UN appointment world czar of migration:

    “The numbers may be intimidating but we have no right to reject,” Mr Sutherland said. “We have no right to do other than be hospitable.”

    “Mr Sutherland, who is non-executive chairman of Goldman Sachs International and a former chairman of oil giant BP, heads the Global Forum on Migration and Development, which brings together representatives of 160 nations to share policy ideas.”

    “He told the House of Lords committee migration was a “crucial dynamic for economic growth” in some EU nations “however difficult it may be to explain this to the citizens of those states”.

    Sutherland said that “the European Union, in my view, should be doing its best to undermine” any “sense of our homogeneity and difference from others”.

    An aging or declining native population in countries like Germany or southern EU states was the “key argument and, I hesitate to the use word because people have attacked it, for the development of multicultural states”.

    “It’s impossible to consider that the degree of homogeneity which is implied by the other argument can survive because states have to become more open states, in terms of the people who inhabit them.”

    And if Goldman Sachs tells us we must welcome unlimited refugees into Europe, and undermine ANY sense of difference from others, that we have “no right to reject” ….. “we have no right to do other than be hospitable”….then who can possibly be against it?

    Because every schoolboy knows who imprisoned Montezuma, who strangled Atahualpa, and that Goldman Sachs rules the world.

    So perhaps this mass migration mostly of economic migrants was not spur of the moment as we have been endlessly told by the media? It seems to have been planned.

    And make no mistake: Clinton and Cruz Are Goldman Sachs’ Candidates…

    Hillary received $675,000 in speaking fees from the firm, and Goldman also has been the second largest contributor through Clinton’s political career, donating $760,740 to her campaigns….and Ted Cruz of Texas, borrowed $500,000 from Goldman (his wife’s employer) to help finance his Senate campaign and then failed to reveal it on one of his legally mandated disclosure forms….

    1. ballard

      (Because “intelligence” means voicing only fashionable and inoffensive opinions. “I used to think, now I just read The Economist.”)

      1. RBHoughton

        Thanks for that post Ballard. Very provocative and food for thought. I suppose getting this cheap labor into Europe will require a new master / servant law and we appear to have seen that developing with automation of production, zero-hours contracts and the rest.

    2. tony

      Divide and conquer. Multicultural nations are far easier to play since there is an internal division that can be used to play populations against each other and less solidarity among the population. I doubt the Reagan revolution could have succeeded had there not been a hated black minority in the US.

  9. IDG

    I hope this time they have a contingency plan and don’t ait to the last hour for that… I mean, the FinMin (YV) not knowing the country even had a minting press (I mean that literally) was pretty bad.

    Italy and Greece should be coordinating efforts to flood the north with refugees too. Let them eat cake…

  10. susan the other

    I have no idea how all those islands are legally placed under state conservation. But I would say this is a possibility: welcome the “refugees” because they are citizens of failed states whose failure was caused by the politically squeaky-clean EU. Right. But nevermind. Give them a home on the island of their choice. Create a juggernaut Greek industry (sewage treatment) and remember the blue and white sandy shores as an idyll. It’s gonna be green and khaki. But it can be managed. And the islands scan be maintained and gradually turned back to blue and white. Maybe in 100years. For now Greece can mitigate the refugee inflow into the EU core – but it should cost the EU thru the nose. Alice.

    1. RBHoughton

      I seem to recall the Sage of Omaha bought one of those islands when Greece was completely hors de combat. Perhaps he’ll now have a burgeoning population to start manufacturing something.

  11. TG

    Oh, but I thought more people GUARANTEED a bigger pie for all? Surely all those new workers added to destitute Greece will only increase wages and living standards? Isn’t that the standard meme here?

    But seriously, anyone saying that Merkel is acting out of compassion should have their head examined. Merkel was perfectly willing to let the Greek people starve in order to help bail out her wealthy patrons from their foolish investment policies. She unilaterally opened the entire european border to unlimited third-world immigration obviously only for the cheap labor – but she wanted workers and got people instead! Ooopsie! So let’s just dump them all on the Greeks and seal the border and let them all die. Yeah Merkel is ‘compassionate’ all right. The same way that a blood-sucking leech is.

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