19 February 2015

Greece’s abasement gambit and why it has failed… so far


So, with the ECB on Wednesday only granting enough additional emergency liquidity to the Greek banks to see them through to next Tuesday, after Monday’s Eurogroup meeting had told Greece: “Here’s the deal – take it or leave it”, this morning Greece’s Syriza-led government tried something new and rather cunning. Let’s call it the “abasement gambit”.

The abasement gambit worked like this. In advance of January’s elections, Syriza had assured the Greek people that the Germans were bluffing and would back down if a new Greek government acted tough enough.  (See this interview, where at 8 min 30 secs the journalist asks Syriza leader Alexi Tsipras “What if Merkel answers ‘no’?” Tsipras responds “there is not a single chance in a million for Merkel to say ‘no’”.”) They insisted that extending the troika austerity and structural reform programme was inconceivable. Tsipras gave speeches saying that Syriza would not be like governments of the past that U-turned. Greek finance minister Yanis Varoufakis said an alternative to austerity was needed for all the peoples of Europe (and, incidentally, that Italy was bust).

They could not have been more explicit. They could not have gone further out on a limb in insisting that there would be no compromise.

Hence, when, this morning, Varoufakis applied to extend the troika programme for six months, even agreeing that Greece’s conformity with the programme be supervised by the European Central Bank, European Union and IMF — the hated troika – there was general astonishment. Commentators declared it total capitulation, a humiliation for Syriza, with its folding under pressure and surrendering. Some commentators even expressed concern that the capitulation appeared so total and so humiliating that the Greek government might even fall.

And that is the cunning bit. In the abasement gambit you grant your opponents such a total political victory that they feel they must grant you some concessions on points of substance to save your face and allow you to carry out your surrender without being replaced by others.

The points of substance the Greeks tried to smuggle through acceptance of in this way were potentially very significant indeed.  Their letter applying for the six-month extension stated Greece would ensure that “working closely with our European and international partners…any new measures be fully funded while refraining from unilateral action that would undermine the fiscal targets, economic recovery and financial stability.”  So any unilateral measures that would not “undermine the fiscal targets, economic recovery and financial stability” would be fine.  Well, of course, Syriza claims that almost all of its measures — from the re-hiring of thousands of civil servants to the banning of banks from repossessing the houses of those that don’t pay their mortgages — will promote economic recovery not undermine it. So that clause gave them carte blanche.

Similarly the clause in the letter saying the six month extension would create a space in which to “agree…mutually acceptable… fiscal targets for 2015 that take into account the present economic situation” amounts to a declaration that Greece’s fiscal control for the next six months would be entirely its own affair.

These points of detail did not pass unnoticed by everyone. The German finance ministry required only a couple of hours to declare tersely, in a 34 word statement, that the Greek letter was not the basis of a substantial solution and was little more than an application for a no-strings six-month loan extension under another guise.  The Athens stock market fell 5 percent in ten minutes in response.

Would the Greeks capitulate in substance as well as on the politics? It appears the abasement gambit was their last shot for now. By this afternoon Athens was declaring that tomorrow’s Eurogroup meeting has only two options: accept the Greek offer as it stands or reject it. A rejection seems very likely. The Germans are by no means the most hawkish Eurozone members regarding Greece. The Slovaks (who didn’t even finance the first Greek bailout) have said providing extra funding to Greece to spend on Syriza’s pet projects is “impossible”. Any concessions from the Finnish government could be fatal with an election pending there. The Spanish government, under pressure from Syriza’s Spanish sister party Podemos, will have no appetite for concessions at all.  Whilst the Portuguese and Irish will want bailout conditions enforced as strictly upon others as they were enforced upon them.

Next week’s story seems likely to be the bank runs and queues into the Greek streets. Syriza will tell the Greeks they tried everything and the wicked Germans still said no. Grexit seems very close now.

Andrew Lilico is the Chairman of Europe Economics