The countdown to the June 5 IMF payment is about to go under two weeks and if there’s one thing that Greece and the IMF agree on, it’s that Athens can’t make that payment unless creditors disburse the last tranche of aid from the country’s current bailout program. European officials have done an admirable job of making life miserable for Syriza since the democratically elected government took over in January, as the “institutions” (and Germany) are keen on sending the following unequivocal message [15] to any other 'leftist radicals' who may be thinking about using the "one move and the idea of EMU indissolubility gets it" routine as a way to negotiate for breathing room on austerity pledges: you will get exactly nowhere and will have a very unpleasant time on the way.
But time is running short and the Greeks have yet to cave on ‘red lines’, setting up the possibility that Germany’s Hellenic debt serfs may actually default next month, triggering instability in Europe and testing the ECB’s “whatever it takes” resolve in sovereign debt markets. That’s not ideal for EU officials who would much rather force PM Alexis Tsipras to abandon his campaign promises in exchange for aid or, perhaps better yet, make things so unbearable for Greeks that the populace begins to ask itself if a government of pandering technocrats is better than starving. This is perhaps why both Moody’s and Schaeuble stepped up their efforts [16] to trigger a terminal bank run on Wednesday.
Whatever the case, it is becoming increasingly clear that the Syriza show will ultimately have to be canceled in Greece (or at least recast) if the country intends to find a long-term solution that allows for stable relations with European creditors, but as we noted on Wednesday, it may be time for Greeks to ask themselves if binding their fate to Europe is in their best interests given that some EU creditors seem to be perfectly fine with inflicting untold economic pain upon everyday Greeks if it means usurping the ‘radical leftists.’
Given the above, it isn’t any wonder that everyone is now taking a hard look at the political ramifications of the June 5 deadline and implicitly asking if the troika will, in the final analysis, be successful in using financial leverage to undermine the democratic process.
Via The Independent [17]:
Were Greece an independent country it would all have been easy. There is a template. Countries often default…
What has changed now is that Greece is not financially independent. If you don’t control your own currency you become a sort of super-municipality. You can default on your debts, as Detroit has done, but then you will not be able to borrow any more money. So your ability to continue functioning depends on your ability to raise enough tax to pay wages and pensions, and buy the goods and services that any government needs. You are not paying any interest. You are not repaying any debts as they fall due. But as long as enough tax comes in to cover your day-to-day spending, you are still in business.
Until a few weeks ago that looked like being an option for Greece. I suspect that was the reason behind the swagger of its finance minister.
Since then three things have happened, all of them negative. One is that people have been taking their money out of their bank accounts, in some cases literally stuffing it under the mattress…
This closes options. The banks may be unable to pay out deposits when they fall due. So there may be capital controls – indeed that seems extremely likely, though this in effect turns the euro into a two-tier currency, with “good” euros that can cross borders and “bad” ones in Greek banks that cannot do so.
A number of Greek politicians have asserted that they would prioritise payroll over debt service, and that is understandable. But it may not be a question of that: Greece may be unable to meet payroll, even if it pays no interest on its debt – let alone makes any repayments.
So what will happen? My hunch is that there will be some sort of fudge, or at least this is the most likely outcome…
Greece will keep the euro for the time being, and there will be no further formal default. There may have to be a referendum to get popular approval for what will be an unpopular agreement. Then, at some stage in the future, there will be further political revolt.
Then there’s FT, who fears [18] both the leftist ‘germ’ and the dreaded ‘Russian pivot’:
Forget debt ratios, fiscal balances, liquidity crunches and the rest. The EU and International Monetary Fund technicians negotiating with Athens are going through the motions. The Greek crisis was always as much about politics as economics. Now it is all about politics…
Two political impulses are at work. Most obviously, the rest of the eurozone has concluded that Athens is unable or unwilling — probably both — to implement an economic reform programme. The problem is not so much the debt, nor even the pace of deficit reduction, but Syriza’s refusal to embark on reform of the state. The words most often spoken to describe governance in Greece are clientelism, corruption, rent-seeking, special interests and favouritism. Without radical overhaul of the nation’s political and administrative capacity, no economic programme can work…
Greece’s partners also have their own politics to tend. High quality global journalism requires investment. Their political leaders do not see why Greece should be let off the hook. To concede now to Syriza, they say, would be to legitimise the populists in their own countries…
Greece sits in the strategically vital southeast corner of the European continent. It provides an entry for migrants and asylum seekers fleeing the fires of the Middle East, and a potential stepping off point for Islamist jihadis seeking to bring their war to Europe. The Balkans are an area of intense focus in Russian president Vladimir Putin’s efforts to destabilise the western alliance. Greece is a member of Nato. Can Europe really allow the government in Athens to fall into the arms of Moscow?
And finally, Barclays is out with an in depth look at the political upheaval which the bank says is now the base case scenario for Greece:
In spite of recent reported progress, significant disagreements between Greece and the institutions remain. Further, even if an agreement was negotiated last minute on a technical level, the implied U-turn on election promises would likely push the Greek government into crisis, in our view, forcing a change in the current set up.
Such political change could emerge through: 1) a government re-shuffle with more radical members exiting; 2) a referendum; or 3) snap elections. We think that the first scenario is the most likely, which would seem the least disruptive, allowing Greece to ‘return’ to a programme agreement before end-June. Importantly, we think that the Eurogroup could find ways to bridge temporary funding gaps (eg, by disbursing SMP profits or raising the T-bill ceiling), if it deemed the prospects for successfully finalising programme negotiations were good.
In contrast, scenarios two and three would be more disruptive and face timing issues towards the 20 July bond repayment. These would then likely entail full-fledged bank runs and capital controls, and increase the risk of missing the crucial 20 July bond payments. The risk of not ‘returning’ from such a path, ie, stumbling into an ‘accidental’ exit with permanent capital controls and widespread defaults would increase.
Here’s a look at possible scenarios both political and financial...
[19]
...and here’s more on a possible government “reshuffle”...
This combination of growing liquidity pressures and remaining disagreement in the programme negotiations suggests that an eventual agreement would lead to some form of political disruption. Even if the government negotiators were to agree on a technical level at the last minute – which we think is likely – this would imply such a U-turn on Syrizas’ election promises that the government in all likelihood would experience some form of political crisis. We believe the consequence could be either: 1) a ‘soft’ political resolution, possibly involving a government reshuffle and the loss of some radical-left MPs; 2) a referendum; or 3) a call for snap elections.
As you can see, the consensus seems to be that in the end, the troika will succeed in using its financial leverage to force political change in Athens in what is perhaps a validation of Varoufakis’ lament about “relative power” trumping sound “arguments” in his conversations with German FinMin Wolfgang Schaeuble. Speaking of those conversations, we’ll close with what Varoufakis says he would tell his daughter about the incorrigible German paymaster.
From Varoufakis’ blog [20], excerpted from an interview with Die Zeit:
1. If you would explain to a teenager, maybe your own daughter, what your relationship to the German Finance Minister Wolfgang Schäuble looks like – what would you tell her?
I would tell my daughter that it is, from my perspective, a multi-layered relationship. There is a sense of awe that I feel from meeting with a legendary figure whose work I have been following critically for decades. Then there is a strong urge to counter his overarching approach to common problems regarding Europe. Additionally, there is some frustration at not having the opportunity to discuss in a different setting; to stage these meetings in a proper federal, democratic context in which arguments, rather than relative power, would play a more prominent role.
2. What are the European topics you probably could agree on with Mr Schäuble?
That Europe needs a political union and that, without it, our monetary union is problematic.
3. Do you think Mr Schäuble makes mistakes in his analysis of the Greek situation? If yes, which ones?
Yes I do (as I am sure he thinks that I err in my analysis). Primarily, he associates past Greek governments with the Greek people; as if the former reflect the character of the latter. And he does not appreciate how helpful it would be for mainstream Northern Europe to find a modus vivendi with a movement (like SYRIZA in Greece) which may be very critical of European institutions but which is profoundly pro-European and eager to help bring Europe closer together.
