Greece: Still Looking for Better Terms

Published on June 30, 2015

Financial markets are recovering from the sharp sell-off yesterday on leaks that European Commission President Jean-Claude Juncker has floated a last minute proposal to potentially break the impasse with Greece before today’s $1.6 billion June IMF payment deadline and the expiration of the European Union and International Monetary Fund Greek bailout program.

*** The angry reaction of the EU negotiators to Prime Minister Alexis Tsipras’ surprise referendum announcement notwithstanding, the pressure built almost immediately on the EU to come back with a last minute attempt to provide just that bit of extra concession on debt relief, which is clear to everyone needs at some point to be in the mix of any negotiations with Greece. Indeed, it remains the all-important concession that would cut the political Gordian knot for Greece to sign on the dotted line. Brussels, for its part, has already officially down played any major differences between what is being discussed today from the weekend. ***

*** But parsing through those words is, in the end, somewhat pointless in that the “new” proposal is simply a painful reminder that no European government at this point can offer or agree to suddenly deliver major new concessions to Greece under duress. What does matter from the European side of the table is the continued and explicit emphasis that formalizing the creditor’s commitment to consider (i.e., deliver) some debt re-profiling – in October – as long as Tsipras agrees to at least some of the technical terms of the bail-out is and remains on the table. ***

***As a confirmation that debt re-profiling (restructuring, forgiveness, however you want to call it) is key for the Syriza government’s negotiating plan, Athens has this morning sent a letter to request a third bailout package to the ESM, in which, in exchange for the implementation of the measures requested by the Institutions, it demands an intervention on the debt load. While there is no hope that the plan could fly as it is – the German Finance Minister, read Bundestag, still has the last word on any ESM disbursement – by all means this shows that concessions on debt, and not on fiscal measures, are the real golden bullet for the Prime Minister to win the approval of his own majority in the Parliament – and more widely of the Greek people. ***

*** Meanwhile, in order to avoid default and – more importantly – for the ECB to maintain and possibly even increase (highly unlikely) the Emergency Liquidity Assistance, Greek Prime Minister Alexis Tsipras has also requested a short term “dry” – i.e., no money – extension of the current program, which the Eurogroup will discuss at 6 p.m. London time tonight. ***

An Ineptly Offered “New” Proposal

With all due respect to Juncker’s latest efforts, the “proposal” has been delivered in such a ham-fisted way politically that it is essentially doomed from the start because it requires an impossibly quick and politically humiliating reversal from Tsipras on almost everything he has staked out on the referendum and the bailout terms. To be fair, at this late point in the game, and with such a continued aggressively defiant swagger from Athens, it would have been a challenge indeed to construct a deal with enough nuance to thread that needle otherwise.

Namely, from a logical perspective – which admittedly may not be the best way to frame these negotiations anymore – while yes it makes sense to require that Athens actively support any deal struck at the eleventh hour, to essentially demand Tsipras to do so in a public and humiliating 180 degree turn to suddenly campaign for a YES vote to the “nasty” troika deal simply was politically amateurish. The politically smart tact that would have created room for maneuver for Tsipras to say yes would have been (and still could be) to suggest Tsipras cancel or at least postpone the referendum.

Indeed, Deputy Foreign Minister Euclid Tsakalatos, the Greek lead negotiator and erstwhile adult in the room, left open the door to exactly that, namely, the possibility that Athens may reconsider the referendum if the EU presents a deal “acceptable” to them “between now and the weekend.” But therein also lies the danger – the window is rapidly shrinking if it hasn’t already disappeared for sweetened deals from the EU under the pressure of an impending referendum.

While yet another frustrating sign of the gamesmanship played by Athens, those comments by Tsakalatos also reflects a highly dangerous and unwelcome sign from Athens of its willingness or ineptitude (take your pick) to trigger what we firmly believe is still their ultimate “bluff” for a better deal  going ahead and holding what will undoubtedly be an extremely dramatic referendum with potentially historic consequences and less than ideal risks and result for Syriza itself – a Plan C they do not really prefer with the full understanding that the latest polls show a YES vote as the most likely outcome.

While all sides are now scrambling to downplay immediate contagion from a missed payment today after having previously warned of the dangers in a missed payment, we are more than a little hesitant to ignore the significance of a missed deal today. At the very minimum, it could and is likely to poison the atmosphere and even accelerate the political push towards a contentious referendum and to raise the stakes even higher this weekend.

High Stakes Referendum

If and when it comes to a referendum, we have written about the political dynamics and expectations that the YES vote will still prevail (SGH 6/28/15, “Greece: Searching for a Final Deal on the Debt”), which seems to be sinking in on markets today. There nevertheless remain many open questions on what that will ultimately mean for Tsipras, the longevity of his government, and for any deal with the EU, assuming a YES vote does indeed prevail.

And with so many moving parts and the hope of last minute deals however unrealistic they may prove to be, we would take any commitments in public statements by either side or offers being made of deals, resignations, or threats in headline-grabbing “tweets” with an enormous grain of salt.

Whether the referendum will ultimately result in a couple of cabinet reshuffles, a new coalition, new elections, or even a new government is anyone’s guess amid this intense state of political flux; it does remain true, however, as we have written repeatedly that the opposition is in complete disarray and has highly doubtful prospects for any gains even if there were elections any time soon.

We in fact continue to handicap Tspiras’ ability to survive considerably higher than most of the reports we have seen. But of one thing there is no doubt in our minds, a referendum at this point is not the ideal path Tsipras would have liked or chosen if he felt he had any remaining options; and the referendum is fraught with serious risks Syriza would rather avoid, a collapse of the government among them.

Referendum Polling will Narrow

As to the referendum itself, we have been and continue to expect a YES, but we would be remiss not to caution that the political polling on the ground will inevitably narrow on the likely outcome as Sunday nears, making for a potential cliffhanger.

EU officials have for months made a case for the irreversibility of the Euro, and pressed the narrative that a Greek default can be handled, downplaying the potential impact of a missed payment to the IMF, and offering the calming reassurance that Greece can remain in the Eurozone and the EU with continued access to structural funds and other financial assistance. But now with the starkness of a yes or no referendum on terms of the European bailout, they are in full campaign mode to raise the stakes by warning the Greek public that a NO vote on the deal is in effect is a vote for Grexit.

One has to be concerned that even with capital controls that somewhat benign former message may be hard to reverse completely at this point, giving additional ground to the NO vote on top of the clear minority but nevertheless significant portion of the population that is now willing to actually entertain an exit from the Eurozone as a preferable solution to Greece.

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