Greece: Hardball

Published on February 16, 2015

A few hours ago Greek Finance officials stormed away from debt and budget negotiation discussions with their EU counterparts, with an official anonymously vowing Greece would never concede to the EU’s “absurd and unacceptable” demands.

Here are some key points we would add to our report from Friday (SGH 2/13/15, “Greece: Structuring and Selling a Marginal Deal”) in light of the developments over the weekend and today that may be different or in addition to the headlines and news recaps you have by now been receiving in your inboxes.

– From what we understand, even a “friendly” earlier language draft presented by European Commission President Jean-Claude Juncker and Commissioner Pierre Moscovici that Finance Minister Yannis Varoufakis now claims he would gladly have signed if only it hadn’t been sandbagged at the last minute by the hardliner member states, courtesy of Eurogroup President Jeroen Dijsselbloem, would have allowed funding for a four month, not six month extension of the program, or whatever they end up twisting themselves into calling an extension when all is said and done.

– Those dates matter. You will recall on Friday we wrote that we had indications even if and when there was a deal, the six month deal Greece had suggested and which was being widely taken as a given time frame basis for an extension was not going to fly, including especially in Berlin, as it was too costly.

– A six-month deal would essentially rush funding to Greece over another key summer redemption hump, specifically of bonds owed to the ECB, with little leverage or time to ensure Greek compliance by even “EU Institution” — forgetting evil Troika, for now — budget rules. That is some real financial hardball.

– And for all the sweet talk from French officials of playing mediator with Germany, we hear in fact that even the wording of the harder final language rejected by the Greek delegation was agreed to by the EU member states with no (vocal, at least) dissents. Yes, that means unanimous, and contradicts the Greek spin and narrative in the aftermath today of everything going swimmingly well until railroaded at the last minute by hardliners.

– Greece has been given until the end of the week to strike a deal, and while that may not be a deadline set in stone, it is a pretty serious deadline in having to meet potential parliamentary ratification schedules in Finland, Germany, the Netherlands, Estonia and Slovakia before Greece runs out of money at the end of March (the real cash deadline).

– The ECB, if it can, will most probably, and grudgingly extend the ELA facility for Greek banks on Wednesday when it comes up for review again, even if there is still no deal yet by then, as none of the parties will care to threaten that lifeline by calling a formal end to negotiations for that very reason.

– But the ECB cannot fund a bank run, and unfortunately for Tsipras, market pressure in the meantime will threaten his fate far more acutely than the EU or global economies, even if there is some downdraft in the broader markets this week.

– Greece will certainly be reminded yet again that for all of Tsipras’ demands the democratic will of the people be met, the EU has constituencies and taxpayers of its own – and he may want to note a poll last week in which a full 48% of Germans surveyed said they would prefer Greece now leave the Eurozone (even while a vast majority expect they will however get more German money).

– And while everyone is of course committed to finding a compromise on Greece, this is not 2011 or 2012, and the demands from the Greek “not yet ready for prime-time” leadership for Nazi-era war crime reparations, goofy Plan B threats to run to Moscow or China, and not so subtle, ominous predictions of the collapse of Italy and the Eurozone if Greece were to fall, are all dogs that do not bark anymore. B team, meet Plan A.

– Tsipras of course ultimately understands this, and indeed even the Greek official who threw his papers up in the air was careful to say there is absolutely NO WAY he can accede to the EU’s “absurd” demands … “today.” And none of the real, substantive principles and red lines we listed in Friday’s report (no debt write down, maintaining a small, maybe 1.5% primary surplus, and openness to a loan term extension) have been violated or even challenged by either side.

– A major wild card, nevertheless, in addition to the potential risk of a growing panic in Greek markets if negotiations string on for too long, will be the domestic political dynamics in Greece. Cohesion within the Syriza ranks is and never has been particularly strong, and the far left wing of the Syriza delegates, estimated at a third or more of the 149 parliamentary members, will be hard to win over if Tsipras cannot bring home some of the more major, politically visible concessions he ran his election campaign on and advertised to the electorate now for years running. In addition to Syriza, the 13 delegates from the Independent Greek party in coalition also represent a stridently anti-Troika platform.

– But there are many delegates inside and outside the coalition who would be loath to be accused of being the ones who pulled the plug on or even risked Eurozone membership on a political vote, perhaps even if it were to mean a collapse of Syriza and a new chance at life for New Democracy. The scorned runner-ups in the To Potami party, with 17 delegates, or even the beaten down center-left Pasok, with 13, could very well throw in votes behind a more pragmatic Syriza formed budget, for national salvation if need be.

– A parliamentary vote in Athens on a budget that is not deemed enough of a break from past history is nevertheless a risk worth monitoring. We would from this distance suspect it could follow a script similar to the Cyprus budget vote in 2013 that led to capital controls and a messy bank deposit haircut on well-heeled oligarch patrons in exchange for a bailout.

– That vote failed in a first round for being a national pill much too bitter to swallow, but eventually passed because, well, there was no other choice.

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