16 July 2015

Greece – Will the third bailout ever really happen?


The Greek crisis (July 2015 variant) has entered a new phase. Following marathon 17 hour talks, Greece and the Eurozone made a deal-to-talk-about-a-deal (namely a 3rd bailout of some €85 billion) if Greece first, by midnight Wednesday, passed a set of “prior actions” and in addition agreed to near-incredible terms including placing €50 billion in assets outside Greece as part of a privatisation programme to be managed by a foreign financial institution and having almost all its budgetary measures pre-approved by its creditors.

The terms were so humiliating to any country that considers itself a sovereign, nor a vassal state, that there was a strong suspicion they might have been offered in the hope that Greece would reject them.  That leaves the Eurozone in the potentially awkward situation of having to come up with the cash. That’s presumably impossible for Finland (where the Parliament almost removed the negotiating mandate from the Finnish negotiating team), and highly implausible for Lithuania, Slovakia and a couple of other Eastern European states.

These small states withdrawing wouldn’t be enough to derail the 3rd bailout by themselves, but it’s an interesting question how the Dutch or German Parliaments will react to being required to lend when a number of other Eurozone states (potentially up to a quarter of them) aren’t in.  During the negotiations the German finance minister Wolfgang Schäuble made a proposal (thought to have been supported by eight other Eurozone members) for Greece to be temporarily suspended from the Eurozone, probably for a five-year period, and in the meantime provided with humanitarian aid.

(I believe this “temporary Grexit” idea was a legal machination to avoid Greece’s euro departure from meaning either its leaving the EU or there being a new Treaty, because only the UK and Denmark are permanently out of the euro – everyone else is a “pre-in” member of the euro (i.e. legally a member of the euro but just not using it yet).  I don’t think this is the last we’ve heard of the “temporary Grexit” idea…)

The temporary Grexit concept didn’t survive to the final Eurogroup statement, but one interesting question is whether Schäuble has now given up on it or whether he’s biding his time to see whether the Greeks either mis-step (allowing Germany to conclude that they’ve not met the terms and must go) or have new elections and pick a party in favour of a temporary Grexit.  If neither of those things happen by September, when Germany would vote on the precise terms of the 3rd bailout, we could yet see Schäuble lead a Bundestag campaign against this bailout.

The Greeks have not made an auspicious start.  Having undertaken to pass their prior actions on Wednesday, they did not even attempt to hold the vote until well after midnight.  The former finance minister Yanis Varoufakis voted against (along with 38 other members of Tsipras’ governing coalition), clearly illustrating that the Greek side of the negotiations were, for some months, led by someone that preferred Grexit to what he considers a bad deal whilst the German side was led by someone (Schäuble) who probably prefers Grexit to that same deal.  See that, it’s perhaps less mysterious to some (obviously not to CapX readers) why the negotiations were stalled for so long.

Tsipras says he will serve a four-year term, but it now seems unlikely he can survive past September and the Greek Parliamentary vote on the 3rd bailout terms.  The Syriza-Anel rebellion in September may even dwark Thursday morning’s.

One wildcard here is the IMF.  The Eurozone offered no debt relief to Greece in the 3rd bailout.  The IMF says Greece absolutely must have debt relief.  The Germans insist on IMF participation in any further bailout.  I can’t see how the IMF can be in.  Perhaps that will give the Germans an excuse not to get as far as the 3rd bailout vote in the Bundestag in September?

There will undoubtedly be a significant rebellion in the Bundestag even on the forthcoming vote to commence talks on the 3rd bailout, but the real pinch point may come in September when they have to vote to part with more cash.  Given that the Greeks have clearly indicated they have no willingness to repay what has already been lent, Bundestag members will surely be under no illusions that this €85 billion is a loan rather than a gift.

And yet the willingness of the Germans, in particular, and the Eurozone more generally to pull the trigger and tell the Greeks they must leave (even the Schäuble temporary Grexit plan was framed as one of a number of options from which the Greeks might choose, not as an instruction) could, yet, still provide an inertia to carry us through 2015.  I said from the start of the year that the probability of Grexit in 2015 was about 70%.  The only time I moved from that was on Saturday, as country after country signed up to the Schäuble plan.  Then it finally seemed to me that the probability had risen.  I still think it remains above 70%.  The hurdles to Greece ever receiving any of this €85 billion remain formidable.

But if Greece does get the money and does stay in the euro, I think the risk of total Eurozone collapse within a few years will become very high.  Greece leaving the euro was never a big threat to the euro’s long-term survival.  But by keeping it in the euro, Eurozone policymakers have kyboshed their chances of establishing a proper fiscal union with a Eurozone treasury and ongoing annual transfers from richer to poorer regions (for decade after decade).  With Greece out, the Eurozone would have been able to move to that fairly quickly.  With Greece in, there is little to no prospect of deeper fiscal integration – Eurozone taxpayers are not going to accept what they will see as a mechanism for sending yet more money to Greece.

Indeed, it’s worse than that.  I believe that the 3rd Greek bailout will be a seminal moment for Germany’s commitment to the euro.  I think there will now be a significant constituency – and it will grow over time – for Germany to withdraw, destroying the entire project.

I continue to believe that it is more likely than not that the 3rd Greek bailout will never happen.  Indeed, I am flabbergasted that so many folk seem even to be seriously contemplating giving another €85 billion to Greece.  The 2010 Greek bailout was one of the worst economic decisions of all time.  It has set the Eurozone member states against each other, threatened Greece’s Eurozone membership (I don’t believe there would have been any question of their leaving if they had not been bailed out), destroyed the risk-return process in capitalist lending, and retarded the Greek economic recovery (for sure, it would have had a terrible recession if it had not been bailed out; it had a terrible recession even though it was bailed out – the difference is that if it had not been bailed out, by now it would have been recovering).  Have they still not got it?  How, given that almost everyone must now see what a disaster this bailout process has been, are they considering doing it yet again?

Andrew Lilico is Chairman of Europe Economics.