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Grexodus: Worse By The Hour

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It looks like endgame has arrived for the EU-Greek negotiations. Alex Tsipras and Co. had avoided defaulting last week on a large IMF payment they didn’t have the money to make by utilizing a perfectly legal, but rarely used protocol that allows debtors to roll-up multiple payments in the same month into one large payment at the end of the month[1]. That bought Athens an extra 3 weeks for negotiations. The Greek Treasury then rolled-over approximately 3 billion euros in 3- and 6-month T-bills[2]; though given that these are mostly the domestic Greek banks, it’s not as if they had much of a choice.

The Greeks had also been highly successful in their strategy of divide et impera[3]: they had been attempting to split the IMF, Eurogroup and ECB from each other as well as raising the negotiations from the Finance Minister level (Eurogroup) to the national political level. This is why Mr. Tsipras has been meeting with Angela Merkel and François Hollande. And it looked like they were succeeding; there appeared to be some flexibility on the side of the IMF and ECB to “soften” the key issue of fiscal contraction, while Angela Merkel appeared to intervene against the position of her own Finance Minister, Wolfgang Schäuble, in insisting on keeping Greece in the EU no matter what. So things were starting to look a bit sunny for the Greeks.

And that’s usually when it all unravels.

First, the IMF decided that it was all just too sickening and left the talks in Brussels[4]. It would be laughable was it not such a consequential actor: the image of the Fund negotiators rushing for the exit during a bathroom break. The IMF had already said that they would not participate in a third bailout of Greece, so perhaps they merely lost interest in keeping up appearances.

imf

Then Kanzlerin Merkel found out that she had overplayed her hand[5]. It turns out that her conservative backbenchers are far more in tune with Herr Schäuble’s position than her own. So are her voters. So the German Chancellor, who knows better than anyone that a Grexodus would be a political – if not economic –disaster for Europe, has had to back down in the face of a conservative mutiny.

merkel

So the Eurogroup came back to Greece with an ultimatum: agree to pensions reforms and VAT increases within 24 hours or else[6]. These are, of course, impossible conditions for Syriza. Even if Mr. Tsipras could agree to the requirements, the form in which the diktat has been delivered is guaranteed to provoke a revolt in the Greek Parliament. Eurogroup Chair Jeroen Djisselbloem went so far as to say that Greek rejection “was not an option.”[7] No one apparently felt the slightest discomfort with the all too similar tone taken with Edvard Beneš, though that meeting took place in Munich, not Brussels.

At least the iron fist is out of the velvet glove, though anyone on planet Earth who has been reading anything but USA Today and Marca ought to have figured that out long ago.

The real question is: what does the Eurogroup mean by “or else”? They can’t accelerate the payment schedule for the IMF debt and Greece doesn’t owe the ESF or ECB until the 20th of June, i.e. far beyond the 24 hour ultimatum. Either the Eurogroup is willing to look silly or they have an ace up their sleeve. The only ace I can think of is the ECB and its Emergency Liquidity Assistance, the crutch keeping the Greek financial system on one leg. If negotiations break down completely, with both the IMF and Eurogroup walking away, the ECB could turn off the tap and plunge Greece into insolvency overnight. Perhaps that is why the Germans are apparently studying capital controls in preparation for the Greek default[8]. It would be the most logical and immediate weapon available, perhaps the only one.

The only one they need, in any case.

Luckily, there is possibility of contagion has been ruled out.

contagion


 

Sources and Notes

[1] “Greece skips IMF payment, buys itself time,” EurActiv.com, 05 June 2015

[2] “Greece rolls over 6-,3-month T-bills in successful auction,” Reuters, 10 June 2015

[3] Latin for “divide and conquer”

[4] “Greek debt: IMF leaves talks amid ‘major differences’,” BBC News, 11 June 2015

[5] “Germany against third aid programme for Greece under any circumstances –Bild,” Reuters, 11 June 2015

[6] Eleni Varvitsiotis, “Lenders give Greece 24 hours to come up with proposals,” ekathimerini.com, 12 June 2015

[7] Ryan Littlestone, “EURUSD through 1.1200 as Merkel laments strong euro and Dijsselbloem says Greek proposal rejection is not an option,” Forexlive, 12 June 2015

[8] “German gov’t consulting on what to do if Greece goes bankrupt-report,” Reuters, 11 June 2015

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