25 February 2015

Greece gets four months – what will it do with them?


It appears the sequence of events of the latest chapter of the Greek bailout extension saga went as follows. The Greek government sent draft proposals to the European Commission (EC), around Monday lunchtime. The EC sent back that draft with some suggested amendments. Then a formal version was submitted to the EC, ECB and IMF (the “institutions”) just before midnight.

That formal version was deemed adequate by the EC but the IMF and ECB said that whilst it does count as a start-point for the bailout extension it needs considerable tightening up before the IMF will part with its next tranche of bailout funds or before the ECB will allow the Greek banks the collateral waiver (a basis for lower cost ECB loans) that was removed a few weeks ago.

The Eurozone finance ministers appear to have been unable to accept the submitted version but then did accept a revised version which the Greeks also accepted (but nobody has seen the details as I write).

Now the deal goes to certain Eurozone Parliaments for approval.  The Finns seem to say they will pass it this time without a Parliamentary vote.  The Dutch say there is a clear majority for passing it.  The Slovak Parliament has often turned down Greek bailouts before but without that disrupting the process.  So the key is the German Bundestag.  The CSU there appears to be in outright revolt and there is some tension with CDU MPs.  But with SPD support and most of the core CDU on side, it would be very surprising for it not to pass.

There remain a series of hurdles even over the next few months.  For a start, the Emergency Loan Assistance (ELA) the ECB agreed last week to extend to the Greek banks is likely to be exhausted by Tuesday or Wednesday of this week but the ECB is not supposed to re-assess the Greek ELA until next week.  Presumably there will be an emergency ECB meeting on Tuesday or Wednesday to resolve that.  Then the Greek government needs to avoid running out of cash in mid-March.  Probably it will issue some additional short-term bonds (T-bills).  Then some time in April it is required to have the institutions sign off on a more detailed version of the proposals announced today.

That last step could be non-trivial, not least because of what may happen in Greece itself in the interim.  As one might have expected, a significant portion of Syriza (the governing coalition) regards the bailout extension as a sell-out on Syriza’s election platform.  There is some talk of the energy minister and leader of the “Left Platform” element of Syriza’s coalition might even resign, taking much of Left Platform with him.  Some of these may be longstanding opponents of Greece’s euro membership (about 30 per cent of Syriza MPs have opposed euro membership in the past), but these now appear to have been joined by a significant group of Syriza MPs that had, up to now, believed the euro could, with a little pressure, become a left-dominated anti-austerity entity.  This latter group, disillusioned by recent events, now seems to be contending that Greece should use its four months’ breathing room from the bailout extension to organise a friendly default-and-exit.

At this stage these are still very much minority opinions within Greece, however.  Opinion polls conducted during the negotiations (insofar as one can believe them – Greek opinion polls are not always very reliable) appear to suggest Greeks are very supportive of their government’s stance in the recent negotiations even though it got nothing and even though many Greeks realise full well that it got nothing.

Meanwhile the Greek opposition is complaining that Syriza’s conduct will now mean Greece faces a third Memorandum (setting strict limits to its policymaking) in June when, if there had been no elections and the previous programme had been completed as intended, the Greeks would by the end of this week have been much more in control of their own policies.

My guess is that Grexit still, more likely than not, beckons this year.  The Greeks did capitulate last week so abjectly that they just about managed to stay in the euro on this occasion.  One is left wondering what the point is of a supposedly radical leftist movement that sells out its supporters and stated goals so totally.  Maybe, as cynics claimed all along, it was not much more than a vanity project of its leaders – though my strong impression was that Syriza was not just that.  Would other supposedly radical parties really be any different?  Faced with the pressures of office, would Podemos near-instantly kiss the Troika ring?  Is the Front National just Marine Le Pen’s vehicle for obtaining personal power?  Maybe all this talk of the “threat” these radical movements present has been overblown – perhaps they’ll all sell out in the end?

But regardless of that, one more factor suggests that Greece’s euro membership may not last past June: if Greece is to be kept going in the euro past June, given that recent events mean it remains nowhere near being able to fund itself by borrowing in financial markets, it seems likely it will then require yet another bailout, of perhaps more than €50bn.  Will the Germans really have the appetite for that?

Andrew Lilico is Chairman of Europe Economics