The successful end to the brutal negotiations between Greece and the European Union heads of state into the early hours of this morning led to a near capitulation by Greek Prime Minister Alexis Tsipras on nearly every material point, and at least the possibility of another imminent fiscal aid program for Athens. Importantly, it also allows the European Central Bank to keep the 88.6 billion Euro Emergency Liquidity Assistance authorization line in place, and with it, Greece’s standing as a member of the Eurozone (see most recently SGH 7/19/15, “Greece: Cautiously Positive”).
*** Despite the still enormous political risks and financial hurdles that lie ahead in concluding and implementing the deal, we believe there is a very strong chance comprehensive negotiations to reach an agreement on a full ESM assistance program for Greece will be successfully concluded. And though as always we make that assertion with a healthy degree of caution, the usual widespread expectations of an imminent or eventual Grexit among the Euro-doubters is best ignored. ***
The Greek Vote
*** The Greek Parliament will not wait until the EU-imposed Wednesday deadline to pass legislation verifying it will deliver on the agreed measures, but will start the process tonight in a plenary session. Political sources in Greece believe required legislations are certain to pass. ***
** The most bitterly fought point of contention, and the most humiliating measure of many for Tsipras on a political level, was the 50 billion Euro escrow fund negotiated with Germany. After the all-night negotiations, he got little more than a concession that the “pledged” assets be left under Greek and not foreign (Luxembourg) jurisdiction. And in addition, for all the Syriza election promises, the Troika, renamed European Institutions, will be back in full force, monitoring and supervising Greece’s actions as closely as before.
** But despite guaranteed defections within an angry Syria, we are told Tsipras has an estimated 100 or so Members of Parliament still that will do what he asks them to do.
** As to the other parties, as we have expected, the leader of the Independent Greeks (ANEL) Panos Kammenos, and at least some if not all of his small coalition faction are unlikely to back the government’s push to back the measures. But it will regardless fly through parliament with the support of the opposition parties Potami, PASOK and New Democracy, who will vote in favor. ND could split if the party leadership gives them the freedom to vote their conscience (a party meeting is ongoing), but even in that case we are told as many a near two-thirds of the MPs would vote yes.
** And for all the humiliation and backtracking forced on Tsipras, we are still not at all certain it will lead to a regime change as widely assumed by many analysts. Tsipras is still extremely popular and indeed we are told is more in control of his party than before, in particular, with the Left Platform of Syriza increasingly marginalized. Not least of all, the German heavy-handed tactics in the latest round of negotiations is very likely if anything to play right into his case of having been forced into the best deal he possibly could get. Tsipras, we suspect, may not even be particularly damaged by this, at least in the short term.
** Tsipras is certain at a minimum, however, to immediately reshuffle his cabinet as we have been expecting. That is likely to include ditching Left Platform leader and Energy Minister Panagiotis Lafazanis. If he should lose ANEL support, as seems likely, building a new coalition with Potami alone may prove difficult. We are told by Potami party officials they would be hesitant to replace ANEL as sole partner to the left-wing Syriza and thus exposing them to the inevitable political fallout that is certain to come amid the ongoing economic malaise. Potami, however, would participate in a broader national unity coalition if other political parties participate.
** In the medium term, nobody really knows if Tsipras will survive, and the dire economic situation could damage him – however his popularity remains high even if early elections were to be called, there are no serious contenders to his leadership in the political system yet, and one would be well served to remember that he is in total control of some of the key communications media, most importantly the just re-opened public television.
The EU Parliamentary Votes
** For their part, the EU creditor nations which require their own domestic parliamentary ratification have set their elections to immediately follow the July 15 Greek deadline. They are also certain to be contentious as well. There is, after all, an enormous amount of money and credibility on all sides that is now at stake. But out of the hard line countries that require ratification, it is only Germany and the Netherlands’ votes that could make or break a deal, and we do not believe they will.
** That is because while new disbursements from an ESM program require unanimity for passage, the legislation creating the ESM was drafted with an escape clause specifically designed to keep small countries from holding the Eurozone hostage to momentous decisions (if this is to be deemed one). Namely:
By way of derogation from paragraph 3, an emergency voting procedure shall be used where the Commission and the ECB both conclude that a failure to urgently adopt a decision to grant or implement financial assistance, as defined in Articles 13 to 18, would threaten the economic and financial sustainability of the euro area. The adoption of a decision by mutual agreement by the Board of Governors referred to in points (f) and (g) of Article 5(6) and the Board of Directors under that emergency procedure requires a qualified majority of 85% of the votes cast.
** Estonia, Slovakia and Finland do not come close to making up 15% of the ESM capital to block a “qualified majority,” so a failure to pass legislation by these countries would not block a program were push come to shove, although it would certainly be extremely awkward politically to have to call on a majority rather than unanimous vote on such an important request.
** When it comes to Germany, the very public, hardline stance on verification taken by German Finance Minister Wolfgang Schaubele will undoubtedly help solidify badly needed unity to a highly skeptical wing of the Christian Democratic Union and Christian Social Union. And for all the talk of deep discords between the Minister and Chancellor Angela Merkel, the two were never in fact far apart and the hardline in the end was firmly supported by Merkel herself, which should also serve her well in public polling and support for the deal.
** The ultimate passage of a program through the German Bundestag was never really in question if Merkel were to push for one. But there is a risk of not insignificant political damage to her standing with her own CDU/CSU that is at issue if there is enough of a revolt from the right wing of the CDU and CSU that it forces her to rely excessively on the votes of Social Democratic Party “Grand Coalition” partners and other left-of-center parties to win. The more conservative wing of the CDU is restive, and she will certainly struggle with the Bavarian CSU sister party no matter what, but she appears to have navigated the European and domestic risks extremely well for now.
** Netherlands Prime Minister Mark Rutte has already ominously conceded that agreeing to a new debt package for Greece would be a break of his campaign pledge. But he has also added that the pledge was made with no conception that they would be confronted with the bleak make-or-break situation Europe faced this weekend. That indicates to us that he will lobby for an aid package, and take the domestic political hit, rather than as a sign that he will not support it if Greece indeed jumps through the hurdles now demanded of it for its part.
And Still Unresolved Greek Financial Issues
** In parallel to this mid to late July round of political hurdles, there will be a host of serious unresolved financial issues that remain after today’s agreement, some more immediate than others:
** Foremost will be liquidity to the banking system, and closing the enormous gap between the fiscal measures presented last week by Greece that were barely considered enough to justify a 35 billion Euro program, and a massive bailout now that is estimated at 84-86 billion Euros and counting. The enormous gap between the two numbers is dramatically the direct result of the enormous capital flight out of the banking system over the last few months and especially the last few weeks.
** Apart from existing funds remaining in the bailout programs and fresh money applied from the ESM, this gap will have to be filled through extensive burden sharing and “rationalization” of the banking system, and eventually some debt re-profiling.
** We have indeed warned that even with a “successful” conclusion to negotiations, the Greek banking system is highly likely to be consolidated, although under an orderly scenario – meaning as part of the Eurozone and with all the support to the financial system that this inclusion earns from the ECB – we would expect that recapitalization and consolidation will be conducted gingerly, with considerable effort to limit the reforms to equity and subordinated debt and to avoid the far more controversial haircuts to deposits (i.e., those over 100,000 Euros).