Greece’s decision not to pay the International Monetary Fund the €300m it owes the creditor today and to “bundle” all of the €1.5bn due in June to the end of the month means that the long-running saga over Greece is going to rumble on for a while. But a denouement is on the horizon.
The laborious negotiations cannot continue ad nauseam for the simple reason that with the payments due to the IMF, and almost €7bn due to the European Central Bank in July and August, Greece will run out of money. The banking system is already haemorrhaging cash, requiring the ECB to keep upping the liquidity it makes available to member country banking systems that are under pressure. This process is reaching the end of the road too. In a nutshell, the Greek government is going to have to default on someone: its creditors, or its people and its own party. Put another way, if its creditors don’t blink—and the latest proposals they “offered” to Greece constitute a sort of ultimatum—Prime Minister Tsipras will be forced to concede. At the margin, this seems the most likely outcome—at least for the moment.
Among many outstanding issues, one of the most important is Greece’s debt burden. Tsipras told Europe’s top officials and political leaders this week that their proposals were not acceptable and would merely aggravate Greece’s predicament. He countered with Syriza’s own 47-page document including a radical idea for restructuring Greece’s debt.
Remember that this was part of Syriza’s election manifesto early this year, though Europe has persistently ruled this out. Syriza wants the €27bn it owes the ECB to be refinanced (more cheaply) by the European Stability Mechanism; it wants nearly half the €20bn it owes the IMF to be paid off by the profits made by the ECB on its loans to Greece and half to be financed by new borrowing; it wants much of the €53bn it owes bilaterally to European countries to be restructured into a “perpetual” bond; and it proposes that half the €144bn owed to the ESM’s predecessor, the European Financial Stability Facility be essentially half-written off, and half restructured into a longer-term loan with double the existing interest rate of 2.5 per cent. It seems most unlikely that any of these proposals will fly—or at least not until there are even more complex negotiations over a third bail-out package later this year, assuming that moment arrives.
Another key issue is the size of the primary balance—the fiscal deficit minus interest payments—which Greece is expected to generate to help pay off creditors. Because Greece’s economic situation has again deteriorated, the primary surplus of 1 per cent of GDP that was expected in 2015 now looks like it will be a deficit of 0.6 or 0.7 per cent of GDP. So, Greece wants the 1 per cent lowered significantly, while the creditors have agreed to target the 1 per cent instead of a previously targeted and crippling 3 per cent. In 2016-2018, the creditors have agreed also to lower the surplus targets to 2 per cent rising to 3.5 per cent, but these numbers are also too high for Syriza.
Fundamentally, the creditors might be persuaded to soften their terms if Greece were to deliver on those infamous structural reforms, including reform of Greece’s chaotic VAT system, unaffordable pension promises, reform of the civil service, labour market flexibility, and more solid commitments to privatisations. Some of these Syriza seems quite comfortable with; for example, overhauling and strengthening of the tax collection authority, and gradually raising the retirement age. But there still seems to be something of a gulf between what the creditors want to see in terms of commitment and capacity to reform, and what Syriza is prepared to offer by way of return.
Deep down, this is an issue of trust, or rather mistrust, on both sides after four years of mutual disappointment, now compounded by Syriza’s combative new negotiation agenda and style, and the eurogroup’s more conservative and orthodox “show me” insistence with regard to reforms.
Things could turn out better than most people expect. We should not forget that even though the politics inside Greece, and across the rest of the eurozone, seem to be driving Greece out of the euro, slowly and surely, geopolitics is pushing it back in again. Think only of Europe’s migrant crisis, of the stand-off with Russia over the Ukraine which might one day spill into the Baltics, and of an increasingly truculent Turkey on Europe’s (political) borders, where elections shortly may hand even greater authority to President Erdogan. How much does Europe want a weakened, or even a failed, state in Greece cut loose, so to speak, on its southern flank? This “nightmare” is almost certainly what is driving the desire to keep Greece inside the Euro.
Once you write one nation’s debt off; once you make major concessions to Greece that Ireland, Spain, and Portugal did not demand or get; once you automate transfers or go down a Marshall Plan route for one country; once you start to do these things, the whole nature of the monetary union changes and in some respects would require a change in European treaties that no one wants to embrace—at least this side of the German and French elections in 2017.
For these reasons, my own view is that the eurogroup is at the end of the road, or very close. This means that Tsipras’s counter proposals won’t get very far. He may receive some further concessions but ultimately he is going to have to take the eurogroup proposals, for the most part, to his party, where there is vocal opposition from its left wing, and to his parliament and people.
The chances are that he is not willing to take Greece over the edge. He will probably present what he would regard as an unsatisfactory programme, but the only one on offer, to Syriza, and win despite opposition. He would certainly get a parliamentary vote in favour if it came to that. And, to acknowledge the scuttlebutt, if he had to hold snap elections or a referendum, the probability is that he’d win that too. These are hunches rather than predictions.
If they’re mostly in the right ballpark, then the current stand-off will end, the remaining €7.2bn of the second bail-out will be released, and Greece will make it through the summer payments programme. But “normal” service would be resumed soon enough; Greece would then have to negotiate with its unwilling and grumpy lenders a third bail-out programme that could run to €40-60bn, and you might well ask “who will (want to) pay?” It’s hard to envisage the Greek financing drama going on forever.
If the political hunches or calculations prove wrong, and Syriza is unwilling to budge much, then we shall soon see capital flight from Greece triggering the imposition of controls over the ability of Greek residents to send capital outside the country, and a formal decision to default. This is what countries with intolerable debt burdens tend to do so as lower the burden at a stroke, and buy time in which to make economic adjustments including devaluation. But in Greece’s case, there will be a fiery debate about whether or not Greece can default, not devalue and remain a euro member by introducing a parallel currency. Or whether any default will be a step towards inevitable exit from the system with all the uncertainties and precedents that such an outcome might entail. By the end of June we will know if the clock has finally run out on Greece’s euro membership or been restarted for another drama later.