23 April 2015

Greece: There has been no progress on the current deal, so why would the Eurozone agree to another deal soon?


This Friday the Eurogroup finance ministers are meeting again and some claim that “hopes are high” that it will result in an agreement between Greece and its creditors.  It’s perhaps important to clarify that for “some” here you should insert “Greek officials”.  Most other sources claim there’s no chance of any agreement at all.

Things are getting tight in Greece.  Without agreement with its creditors, with the economy going south dragging down tax receipts, and still having to make debt servicing payments to the IMF and others, the Greek government appears to have been running short of cash.  To buy a little time, it passed a decree requiring public bodies (including things like universities and local governments) to transfer any funds they had to the Bank of Greece.  Some of the local Mayors have resisted this, claiming it’s unconstitutional.

Be that as it may, the government seems to think it can get through April.  May might be trickier, with the Greek Deputy Finance minister saying they might be €2.5 billion short.

The discussions of the past couple of months were supposed to be about how to finish off the Greek second bailout programme by June 2015.  But that has dragged on for so long that it now appears that discussions about finishing the current programme have become mixed together with trying to agree a new programme to apply from June onwards.  One presumes that both sides are now inclined to believe there is little point in giving Greece more money or Greece enacting additional reforms by June if Greece is going to default and/or exit the euro in July or August or a little later, anyway.

There is no realistic possibility of Greece getting through July and August without defaulting on major debt payments unless it gets a third bailout.  Many commentators still seem to believe such a third bailout is likely.  They believe that, at the last moment, Greece will capitulate on reforms and the rest of the Eurozone will capitulate on writing down some of Greece’s past debts and some deal will be struck to avoid a big crisis.

I don’t altogether rule that out — I’ve said for some time I think there’s perhaps a 30% chance Greece is still in the euro by the end of this year (and if it’s still in by the end of this year it will probably be in for a lot longer).  But I don’t understand how those folk that are so confident it will happen imagine it could work.

Obviously there could be huge internal political difficulties for the Greek Prime Minister Alexis Tsipras if he were seen to agree to extensive additional structural reforms, privatisation, public sector salary cuts and so on, even if he were to get some debt forgiveness in exchange.  And there would be huge internal (and constitutional) difficulties for the rest of the Eurozone if they agreed to any debt forgiveness.  The Greek government might fall.  If it didn’t fall, the Greek Parliament might not pass the measure.  If it passed the programme the German Parliament might not approve paying out.  And so forth.

But although I think all of that alone would mean it is most unlikely that there could be a third bailout deal, none of it is even, any more, the most significant problem.  The single most significant problem now is, how is the Greek government supposed to convince the rest of the Eurozone that it has in fact capitulated?

After all, in February many thought it had totally given way to the Eurozone.  It seemed to roll over so abjectly that one wondered what the point had been of Syriza as a political movement.  But then having apparently capitulated at the meetings of late February, the Greek government promptly went home, told its own population that it had won a great victory and failed to do anything of any substance that its Eurozone partners thought it had agreed to do.

So if, in May or June, Tsipras goes in, ashen-faced, to Angela Merkel and tells her that he understands now how few cards he truly holds, if he wants Greece to stay in the euro, and that he grasps that Greece needs profound economic reforms if it is to be able to service its debts to its Eurozone partners over the longer term, and that those reforms must include privatisations, public sector layoffs, labour market reforms that the trades unions will hate, and so forth — if he goes in and says he sees now that all this necessary and will make sure it happens, why would she (or other Eurozone heads in Spain or Finland) believe him?  Won’t the rest of the Eurozone be once bitten, twice shy to an attempt on his part to give in?  They’ll expect that he’ll tell them he’s agreeing to give up and then as soon as he’s back in Greece proclaim that it was the rest of the Eurozone that gave up and he’s not implementing any changes except to hire more public sector staff, reverse some privatisations that happened already, and pass some trades-union-favouring legislation.

I can’t see how this can work.  To make the rest of the Eurozone believe he’d given up, Greece would have to have fresh elections where he’d argue in favour of his own u-turn, or have a referendum where further austerity was supported, or pass the required structural reforms through the Greek Parliament first and then see them implemented on the ground and only after that get the Eurozone heads to agree that was enough to give Greece more money.

Maybe all this can be done.  Or maybe the Greek government will collapse and the population will vote New Democracy back in.  Or some other such dramatic turnaround that we cannot even imagine yet.  I do think there may be a 30% or so chance that something works.

But as things stand there has been no progress at all on the structural reforms Greece promised, more than two months ago, to have implemented by now for a four-month bailout extension.  If that’s what “Making a deal” with Syriza means, why do so many folk remain so sure that the Eurozone heads would want to do a larger, €50 billion deal in another month’s time?

Andrew Lilico is Chairman of Europe Economics.