Will they default or will they not? Are they out of cash or can they scrape together another half billion by tapping some heretofore untouched pocket of the public purse? Did they just institute capital controls? Because that’s what it looks like. What was Varoufakis thinking? Is an advance from Gazprom on the way?
These are just of few of the many questions which seem to get asked and re-asked on an almost daily basis as the crisis in Greece plays out like a slow motion car crash that no one can take their eyes off of even though everyone (the market, the creditors, Athens … everyone) is exhausted, exasperated (“Gratigue” maybe?), and ready for some manner of resolution. Unfortunately, as Citi noted last week, the most scenario will be a kind of euro purgatory characterized by capital controls, defaults, and prolonged pain and suffering for the populace. This state of affairs is known as “Grimbo [15],” and as Reuters notes [16], no one involved in the ordeal wants history to remember them as the villain. Here’s more:
The game of chicken between Greece and its international creditors is turning into a vicious blame game as Athens lurches closer to bankruptcy with no cash-for-reform agreement in sight.
Europe's political leaders and central bankers and Greek politicians agree on only one thing: if Greece goes down, they don't want their fingerprints on the murder weapon…
Greece's leftist government has already identified its culprit of choice - Germany, Europe's main paymaster, accused of having inflicted toxic austerity policies on Greeks, causing a "humanitarian crisis".
Euro zone governments are preparing the ground to blame the novice government of Prime Minister Alexis Tsipras for having blustered, obstructed, failed to meet commitments and evaded hard choices while Athens burned.
"We are doing everything we can to save Greece from itself, but in the end, it's up to them," is the message pouring out of Berlin, Brussels and IMF headquarters in Washington.
And then there’s FinMin Yanis Varoufakis who, over the past three months, has put together a SportsCenter-like highlight reel of what he would likely call “kerfuffles [17]” including a speech wherein he references “sticking the finger” to Germany, a very unaustere [18] ParisMatch photoshoot, and a performance at the negotiating table in Riga on Friday that led his peers to describe him as an amateurish time-wasting gambler.
In Varoufakis' narrative, euro zone countries did not lend all that money to save Greece in the first place but to protect their own banks, which had imprudently lent Athens billions.
Varoufakis has widened the circle of blame to the ECB, accusing it of "asphyxiating"Greece by starving its banks of liquidity and severely limiting their short-term lending to the government.
That prompted an indignant response from ECB President Mario Draghi, who told the European Parliament the central bank's support for Greece amounted to some 110 billion euros, but it was barred by treaty from monetary funding of governments.
It now appears that everyone — including Athens — has grown weary of the Varoufakis narrative because as we reported earlier today, Tsipras looks to have replaced [19] the outspoken FinMin as lead negotiator amid pleas from eurozone officials and complaints about Varoufakis’ tendency to “lecture” his EU counterparts rather than engage in serious discussions about reforms.
Relations between Varoufakis and Mario Draghi are reportedly so icey that the two avoided eye contact at the breakfast buffet in Latvia last week which sets up an interesting situation going forward, because as Mohamed El-Erian observes [20], the worse the cash situation gets in Greece, the more critical the ECB’s ELA determinations become:
The most potentially decisive discussions will be taking place in a different venue: Decision makers at the European Central Bank’s will hold their weekly consideration of how much “emergency liquidity” they should extend to Greek banks and on what terms.
At its weekly meeting, on April 29, the ECB will be under tremendous pressure to keep Greece on its life support system. But without progress elsewhere, this powerful monetary institution is at risk of joining other actors in the Greek drama that are unintentionally transitioning from being a major part of the solution to a big part of the problem now and in the future…
El-Erian outlines three alternative scenarios, noting that the existing arrangement whereby the central bank strings Greek banks along even as they become ever more dependent on ELA for their very survival is nothing more than an exercise in can-kicking while pulling the proverbial plug would, in short order lead to capital controls and perhaps to “even more draconian steps to gain control of any idle cash balances” (such as freezing [21] small debtors’ accounts perhaps?).
1. Pretend and extend. The ECB, through the Emergency Liquidity Assistance operated by its network of national central banks, would continue to extend exceptional funding to Greece. This would be done under the pretense that it is helping Greece deal with a liquidity problem instead of acknowledging the country's true predicament, deep economic and solvency deficiencies…
2. Pull the plug. Under this scenario, the ECB … would limit any further financing to Greece, raising not only the legitimate burden-sharing issues but also rightly noting that liquidity support would continue to prove ineffective without accompanying measures to improve growth and financial solvency... If such conditions failed to be met, the ECB decision would likely lead to even greater capital and deposit flight from Greece. And this, under most realistic scenarios, would prompt the Greek government to impose capital controls, default on payments and take even more draconian steps to gain control of any idle cash balances in the country…
3. Pull the plug as part of a comprehensive Plan B. In this case, the ECB’s refusal to extend additional liquidity support would be part of an attempt (albeit a risky one) at an orderly pivot for both the euro zone and Greece. The ECB would seek to minimize the risk of Greekcontagion and disorderly spillovers to other economies (such as Cyprus, Italy, Portugal and Spain) by expanding its funding windows for both governments and financial institutions. It would also step up its large-scale program of security purchases (known as quantitative easing).
And finally, El-Erian echoes Reuters’, noting that at the end of the day, no one wants to take them blame for a disaster:
One of the big lessons of the last few years is that, regardless of the facts on the ground, no one -- whether on the Greek side or among its official national, regional and international creditors -- wishes to go down in history as the cause of the first exit from the single currency.
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And speaking of the ECB, ELA, and capital controls, consider the following from HSBC:
“Hard deadline” is July 20, when bond held by ECB comes up for redemption.
If payment isn’t made, ECB would likely have little choice but to declare Greek debt ineligible for ELA as collateral.
Capital controls would then be almost inevitable, while solvency of Greek banks could be called into question.
