Greece: Searching for a Final Deal on the Debt

Published on June 28, 2015

The surprise decision by Greece’s Prime Minister Alexis Tsipras on Friday, with no time left to spare as all sides were entering into the final stage of the brutal negotiations over Greece’s bailout program slated to run out on June 30, to throw open the decision of whether or not to accept the EU’s latest “onerous” proposal to a referendum to the public has thrown the Greek crisis into new, risky, and uncharted territory.

In the wake of that rash last minute announcement, and specifically the proposed timing for the referendum to be held on July 5, after the official June 30 end of the program and concurrent payment of a 1.6 billion Euro bullet due the IMF, EU officials swiftly declared the Greek bailout program effectively dead. And the announcement of the end of negotiations laid wide open one of the technical conditions that could lead the ECB to decide to pull, or more accurately disallow, the Central Bank of Greece from providing any further ELA (Emergency Liquidity Assistance) to its banks.

The ECB today refrained from taking such drastic measures – which would in effect have pulled the plug on the entire Greek financial system – but decided to freeze the ELA funding at its current level of 89 billion Euros, accompanied with an unusual public announcement of its decision.

*** The Greek government and Finance Minister Yannis Varoufakis in response have reiterated their adamant opposition to capital controls, and Tsipras has tonight gone to the airwaves requesting the EU reverse its refusal to allow for a short term extension of the program and for the ECB to reconsider its decision and free up more ELA funding in order to allow the referendum to take place without triggering a default on the June 30 IMF payment. But with no more cushion left in the banking system and continued enormous strains on bank deposits, formal capital controls have already been announced for Monday, and we believe it close to impossible the ECB will reverse its decision to cap the ELA at its current levels (see SGH 6/20/15, “Greece: Capital Controls Imminent”). ***

*** After the initial shock of the referendum announcement, the Tsipras government can and will very much be “allowed“ by the EU to go right ahead and hold its referendum, but it will be paid for on its own euro, and capital controls, which are deemed to have been fully self-inflicted by the Greek government, we believe are until further notice here to stay. ***

*** But the real question that remains unanswered is what Tsipras’ ultimate objective was in calling a referendum on whether to accept an “onerous” deal or not? And we believe that objective is to still try and work for a better deal that achieves some modicum of assurance beyond the EU’s 2012 promises on potential debt re-profiling, or, alternatively to be “forced” to capitulate to a deal by a popular referendum, rather than any desire to actually risk an outright rejection of the EU plan, and with it the enormous ensuing turmoil that would result from the total destruction of negotiations that have come so far already. In other words, its pledge to campaign for a “NO” vote in the referendum on the EU plan we believe is no more than a political straw man, and an actual NO is the last result Syriza would want out of this referendum. ***

*** There are certainly many members of Syriza who would gladly push the country into hard default and many voters who may even be under the illusion that a NO vote could imply bringing the EU back to the negotiating table without leading to significantly more dire consequences. But that number is rapidly shrinking, and the reality of capital controls if anything will now inject an element of sobriety into any voting process if it indeed ever takes place that may not have existed even last week. And for all the loud rhetoric, Tsipras is calling for a referendum with full awareness that the general population prefers even a bad deal to no deal at all – by something like a twenty point margin – and that his party’s stated hard line on a deal is certainly not shared by the population. Even Marxists, curiously enough, know how to read polls. ***

*** And the specter for some greater promises for debt relief is not entirely lost. Going into this weekend we were alert to the acute risk of capital controls but frankly expected, and were hoping for, just a tiny hint of movement on debt re-profiling from the EU Institutions even as they busily scrambled to finalize the bazaar-like negotiations over the fiscal budget plan. An agreement on the debt remains the final ingredient to finding a solution to the Greek impasse, and all parties know that. Even minor assurances could potentially provide just barely enough political cover for Tsipras to pass a “horrible” deal and cross his “pink lines” even with some support from outside parties (see SGH 6/25/15, “Greece: Final Push for Weekend Deal”). ***

*** Indeed debt re-profiling was actually explicitly left on the table, and was even expected to have been a point for some final fine tuning at the heads of state level over the weekend. But it did not come fast enough for Tsipras, triggering his “Hail Mary” decision to pre-empt those last ditch discussions and call a referendum on the latest program presented to the surprise of even his own negotiating team in Brussels. ***

*** And while it will politically be extremely controversial for EU member states to go any farther out on a limb at this point and put additional debt promises on the table on top of the last “take it or leave it deal,” the elephant is now clearly in the room, and even as we write the latest communique from the Institutions has made it clear that yes, indeed, a discussion on debt re-profiling would have (and still could be) on the table. To wit, the European Commission went out of its way to present its latest offer in full transparency to the Greek public – even if it may not even in the end constitute the basis for a legal referendum anymore at this point – including with this pointed phrase:

“The understanding of all parties involved was that this Eurogroup meeting should achieve a comprehensive deal for Greece, one that would have included not just the measures to be jointly agreed, but would also have addressed future financing needs and the sustainability of the Greek debt.” ***

Seeking Cover, when Yes means No

What Athens clearly wants at this point is for the Institutions to come back with just that bit more of cover on the debt side, and if impossible, the other, and certainly more disruptive alternative will be to have the public “force” Tsipras to grudgingly cross his red lines with a yes vote on the referendum (even as he “fights” against its onerous terms).

While such a defeat on principle would be fraught with long term political risk for Tsipras, it may not lead necessarily as most analysts expect to an imminent collapse of his government. Indeed we know that Syriza has been in quiet discussions with To Potami and PASOK all along in case their votes and a new coalition are needed. As we have said, here, the number of defections within Syriza will be ultimately what matters most, and not the mere fact that Tsipras may need to rely on votes from outside his coalition.

A weak agreement will certainly humiliate and open Tsipras and Syriza to political attacks from the opposition, but we do not agree with the conventional wisdom that it will force an election – although that may come further down the road. Indeed, opposition parties are fuming at having been put in a position of acceding to a “too little too late” deal from the EU after months of incredibly destructive negotiations that have pushed Greece even further towards the brink of economic collapse. But they will we believe grudgingly and bitterly be forced into sharing political responsibility with the disastrous Syriza team when it comes to insuring the country’s future in the Eurozone. Furthermore, they are under no illusions that they would actually win an election away from Syriza if they could or even were to try and call one – at least at this point in time.

Last but not least, for all the outrage expressed by the EU at the sudden uncertainty and wild card of Tsipras’ announcement last night to hold a referendum, from the EU’s perspective it is in the end far preferable to have a deal with Greece that has the support of a broader mandate both of the population in general and of political parties from across the spectrum than one that is passed with a narrow mandate. So having some cross party participation for a deal, without the turmoil of an entire government collapse, would if anything be most welcome of all.

Markets will open on Monday faced with an enormous amount of uncertainty and a new reality in the unrelenting Greek crisis. But we firmly believe and expect ECB as well as EU officials to come out in full force to emphasize not just the tools both the ECB and EU have to protect and ring fence the Eurozone from any material financial contagion from Greece at this point – but their readiness and willingness to deploy them as well. This is a message that was also communicated to global financial and central bank leaders at the G7 meeting, and one that will be sure to be echoed by non-European policymakers supportive of any ECB efforts to maintain stability and protect the long awaited global recovery as well.

In the meantime, while capital controls and even the threat of holding a referendum under the specter of capital controls clearly introduces an immeasurable element of turmoil, volatility, and uncertainty to the Greek crisis and of course to financial markets, it may in fact finally also introduce a desperately needed element of sobriety to the Greek electorate in addition to the anger that will clearly be directed at the Eurozone partners, and lead finally to an agreement on the inevitable debt re-profiling discussion that needs to take place.

And so while the latest developments have set in motion a new chain of events that with it bring new risks including a renewed strain on global financial markets once they reopen on Monday, we do not see these as unworkable or automatically leading to a hard Greek default, and Grexit – at least not as of yet.

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