The Song and Dance Resumes
In recent days it has become increasingly clear that the political theater between the EU and the new government Greece is set to continue. For a while, markets were convinced that what is widely considered the worst case scenario (a Greek default and exit from the euro) had been avoided, but it appears it hasn’t been avoided just yet. Various EU politicians have expressed concern over the public statements of Greek politicians in recent weeks, as they are making it tougher for them to sell the agreement to their own parliaments and citizens, but these statements may be mainly designed for the Greek government’s domestic audience anyway.
Photo credit: btwcapture
According to recent press reports, the EU is not happy with the reform proposals submitted by Greece. Ideas such as to use tourists as undercover tax collectors didn’t really detract from the proposal’s lack of substance (from the point of view of Greece’s creditors). The Greek government does of course have a very valid point when it calls the adoption of the extend-and-pretend bailout that only ended up increasing Greece’s public debt even more a major mistake. It is also true that the bailout decision was very much designed with the protection of French and German banks in mind, which lobbied quite hard in its favor (one can sense their absence this time around – as they have shed much of their exposure to Greece).
However, a default would have instantly bankrupted the Greek banking system as well. Greece’s banks are the Achilles heel that likely caused previous Greek governments to grudgingly accept the harsh bailout conditions prior to the last election. We suspect that this has also been a major factor in Syriza’s toning down of its rhetoric after the election. Admittedly, we are still not sure if the new government isn’t merely playing for time in order to prepare for an exit anyway. Some of the noises emanating from Greece do suggest that there are certain minimum expectations the government wants to see fulfilled if it is to agree to a continuation of the bailout agreement (apart from changing its name).
“Greece’s provisional agreement with creditors to avert a default started to crack as European officials said the country’s latest proposals fell far short of what was put forward two weeks ago and Greek ministers floated the prospect of a referendum if their reforms are rejected.
The measures Greece’s government sent to euro-region finance ministers last Friday, including the idea of hiring non-professional tax collectors, is “far” from complete and the country probably won’t receive an aid disbursement this month, Eurogroup Chairman Jeroen Dijsselbloem said on Sunday.
“We definitely still have an immense path ahead of us,” German Chancellor Angela Merkel said during a televised news conference in Tokyo. “We obviously have the political goal to keep Greece in the euro area. But at the same time, there always are two sides to the coin: the solidarity of European partners on the one hand and the readiness to carry out reforms and commitments in one’s own country on the other.”
Greece’s anti-austerity government, elected in January on a promise to renegotiate the terms of a 240 billion-euro ($261 billion) bailout, has to present detailed proposals to European creditors or risk running out of cash as soon as this month. The renewed tensions threaten to temper a rally in Greek bonds sparked by optimism over the provisional accord.
The euro-area finance ministers will discuss how the technical teams can start assessing the proposed reform measures. Greek authorities will hold talks with the creditor institutions in Brussels and Athens, European Commission spokesman Margaritis Schinas told reporters in Brussels.
The country is seeking the disbursement of an outstanding aid tranche totaling about 7 billion euros. Without access to capital markets, its only sources of financing are emergency loans from the euro area’s crisis fund and the International Monetary Fund. Its banks are being kept afloat by an Emergency Liquidity Assistance lifeline, subject to approval by the European Central Bank.
“I can only say that we have money to pay salaries and pensions of public employees,” Greek Finance Minister Yanis Varoufakis told Italy’s Il Corriere della Sera in an interview Sunday. “For the rest we will see.”
Indeed, the rally in Greek government bonds has begun to look a bit “tempered” of late:
5 year government bond yields of Greece – the brief recovery has given way to fresh concerns – click to enlarge.
On the other hand, if we had a nickel for every time we have heard over the past five years that “Greece has to present detailed proposals to European creditors or risk running out of cash as soon as this month”, we could probably buy Greece and put on our front lawn for decoration purposes.
Trump Cards and a Tense Atmosphere
That said, the tone of the exchanges between Athens and Brussels has rarely been as tension-filled as it is now. Both sides believe they are in possession of one or more trump cards (we have previously remarked on the “Mexican Stand-Off” qualities of this confrontation). The Bank of Greece has incidentally recently updated its data on Greek deposit liabilities and lending by the Bank of Greece (i.e., the euro-system) to Greek commercial banks until the end of January. Below are updated charts – we once again include an estimate of the additional deposit outflows that have likely taken place since then.
Domestic deposit liabilities of Greek banks until end of January 2015 (black line), with our estimate for the period February to early March added in green – click to enlarge.
The updated chart showing the liabilities of Greek commercial banks to the Bank of Greece was a bit of a surprise for us – these have increased far more as of the end of January than we had hitherto assumed. Since our last estimate has proved way too low, we haven’t included one this time, but one could extrapolate a bit on the basis of the deposit outflows depicted above; presumably, the Bank of Greece has so far substituted close to 100% of the funding banks have lost due to withdrawals by means of ELA and other instruments.
Bank credit provided by the Bank of Greece until the end of January: the surge was much greater than we initially believed based on the official ELA “allowance”. Since then it has presumably continued to rise at a roughly similar pace – click to enlarge.
These are among the main “trump cards” held by the EU: the threat that the ECB might curtail or completely cut off ELA continues to hang over the Greek banking system. Note that these banks have been declared “healthy” in the ECB’s stress test following their recapitalization. However, they are sitting on €90 billion+ in NPLs, and we have great reservations regarding their alleged health in view of this mountain of dud loans. Similar to other fractionally reserved banks in the euro area, their “health” likely also depends greatly on whether or not their assets are marked to market.
However, Greek politicians are in a combative mood again, as Ambrose Evans-Pritchard reports:
“Relations between Greece and Europe’s creditor powers are dangerously close to breaking point. Both sides have issued ultimatums, each insisting angrily on fixed positions and lashing out at each other with barely concealed animosity.
“If they decide to kick us out, the damage will be greater for them,” said Manolis Glezos, the war-time resister who ripped the Nazi flag from the Acropolis in 1941. Mr Glezos, a Syriza MEP and the party’s venerated elder statesman, told the Daily Telegraph that his movement never wished to take Greece out of monetary union but will not shrink from doing so if EMU authorities insist on suffocating austerity. “You cannot attend the negotiating table without carrying this option along,” he said.
Far from subsiding, the defiant language from Athens is growing louder. “If Europe leaves us in crisis, we will flood it with migrants,” said Panos Kammenos, the defence minister and leader of the Independent Greeks party.
“Too bad for Berlin if there are some Jihadis from Islamic State in that wave of millions. If they strike us, we will strike them,” he told La Repubblica, vowing to give illegal migrants valid documents and open Europe’s Schengen frontiers to all comers.
“Relations have reached a new low. It’s turning into an arms race,” said Mats Persson from Open Europe. “These comments are a recipe for matters to get out of hand, and it is becoming increasingly hard for Germany to back down.”
Greek premier Alexis Tsipras is barely more diplomatic than his ministers. Over the weekend he threatened a snap vote on the terms of austerity if Eurogroup finance ministers reject Greece’s latest list of reform proposals.
“If we were to hold a referendum tomorrow with the question, ‘do you want your dignity back or a continuation of these undignified policies,’ then everyone would choose dignity regardless of difficulties that would come with it,” he told Spiegel Magazine. To drive home his threat, Mr Tsipras compared the eurozone to a woolen jumper. “Once it begins to unravel, you can’t stop it any more,” he said.
Yet the Eurogroup did in fact reject Greece’s reform proposals in Brussels today, and in caustic terms. “We have to stop wasting time and really start talks seriously,” said Jeroen Dijsselbloem, the group’s chief. Germany’s Wolfgang Schauble among others insisted on using the term “Troika” – hated in Greece, and now officially abolished – seemingly wishing to humiliate Syriza. The Slovak minister told Greece to “face the naked truth”.
So much for the threats and counter-threats that have been traded in recent days. But there’s always a but, and this time it is delivered courtesy of JC Juncker (who must surely be peeved that the Greeks didn’t get their election right in spite of his admonitions):
Jean-Claude Juncker, the European Commission’s chief, warns that the EMU authorities must tread with great care. “What worries me is that not everybody in the European Union seems to have understood the seriousness of the situation in Greece,” he told Die Welt.
Mr Juncker issued a categorical guarantee that Greece will not be forced out of EMU. “There will never be a Grexit. The country is and will remain a member of monetary union. A Greek withdrawal would lead to an irreparable lost of global prestige for the whole EU.”
If we can take Mr. Juncker at his word this time (considering his views on telling lies when occasion demands, his word must be taken with a pinch of salt), we feel reminded of our previous idea, namely that it may all be nothing but political theater anyway. Once again, we wish we had a nickel for every time someone has said that the government of Greece is going to “run out of money within a month”.
The above excerpts show also what the members of the Greek government regard as their trump card: Namely, that the EU will never allow Greece to leave the euro, due to the threat of “unraveling of the woolen jumper” that is the euro currency. Juncker has formulated what is undoubtedly the view held by the EU’s centralizers. They cannot allow a “Grexit”, as it would represent a “loss of prestige” and would undoubtedly raise new questions about the entire centralization/super-state project.
Conclusion:
The atmosphere has become more tense, and once again it appears – at least superficially – as though unbridgeable differences are making an agreement between the EU and Greece hard to achieve. Experience suggests one shouldn’t take any of this too seriously, but the Syriza government remains a wild card. It seems to be backing down one day and renewing its defiance the next. This is reminiscent of how Mr. Tsipras used to regularly adjust his statements depending on what audience he addressed in the run-up to the election that brought Syriza to power. The upshot is though that it is still not entirely clear what his plan actually is – or if there even is a plan.
A photograph of talks between the EU’s Jeroen Dijsselbloem and Alexis Tsipras. In terms of their body language, it seems as if the former is tense, while the latter seems quite relaxed. Admittedly, we’re not sure if it means anything, it is just an observation.
Photo credit: Petros Giannacouris / DPA
Charts by: investing.com, acting-man.com
Comments
Log in or sign up to join the conversation.