Wednesday evening’s “high level” meeting between between Greek PM Alexis Tsipras, Jean-Claude Juncker and Jeroem Dijsselbloem came and went with little more than a promise [7] to keep talking, in what has become a familiar scene for those glued to the Greek drama.
For now at least, Tsipras appears to be sticking to his party’s so-called “red lines” around pension cuts and a higher VAT, a stance that is apparently incompatible with the prepackaged deal prepared for him by Merkel, Hollande, Junker, and Draghi on Tuesday. Greece presented its own proposal on Monday evening prior to an emergency meeting in Berlin and it now appears creditors may actually have to read that draft if they hope to stick to the idea that Tuesday’s troika offer truly did not represent an ultimatum to Athens. Here’s more via Bloomberg [8]:
Tsipras said demands by the euro area and the IMF for cuts in the income of poor pensioners and increases in value-added tax on power are unacceptable, highlighting what have been red lines in Greece’s stance since his anti-austerity Syriza party swept to power in snap elections in January.
“Ideas like cutting benefits for low-income pensioners, or raising the VAT rate for electricity by 10 percentage points, can’t be a basis for discussion,” he said...
“There was a constructive will from the European Commission to reach a common understanding,” he said.
[9]
(Tsipras in Brussels on Wednesday)
Greece has looked to the commission for support to dilute the austerity-first formula that’s underpinned two Greek rescues totaling 240 billion euros since 2010. This has led to clashes with creditors who say such bailout conditions have worked for other countries such as Ireland now out of aid programs and Greece should get no special treatment.
Creditors want the targets for the primary budget surplus - - the budget balance excluding interest payments -- to be 1 percent of gross domestic product this year, 2 percent of GDP in 2016, 3 percent in 2017 and 3.5 percent in 2018, said the Greek official, who called these proposals a “good basis” for further deliberations on the matter.
Tsipras said both sides were “very close” to an agreement on the targets for the primary surplus.
In other words: things are going nowhere very fast.
Barring some manner of end-around whereby Athens is able to borrow from some as yet untapped source of funds, Friday’s IMF payment will almost certainly be missed (although some reports indicate the government still claims [10] it has the cash). This was largely expected. Given Greece’s dire financial position, it seems reasonable to assume they will take any opportunity to buy time and the bundling option (whereby Greece can bundle all of its June IMF payments into one payment) will afford the Greeks a few days of breathing room while Tsipras tries to close a deal.
Through it all, the troika is still holding all of the cards — or all of the cash. Unless creditors abruptly decide to relinquish calls for pension reform, Tsipras will eventually be forced to accept an unpalatable deal. Even if the ECB were to decide to remain completely neutral by routinely raising ELA and keeping haircuts on pledged assets unchanged, Greek banks will eventually run out of collateral. With deposit flight running above €100 million a day, the coffers would empty in a matter of weeks (if not days). At that point, it’s either introduce a parallel currency or revert to a barter economy.
Given this, the base case scenario still seems to be concessions by Tsipras on pensions and VAT, concessions which will not go over well with Syriza hardliners who essentially put euro membership to a vote [11] late last month. Should Tsipras be forced to accept a deal on creditors’ terms, he will have to pitch the unpopular agreement to an unwieldy parliament — political turmoil will ensue.
Deutsche Bank has more on the possible outcomes:
What are the components of an "agreement"? The first component is Greek government sign-off, with the Prime Minister ultimately responsible. Our continued (marginal) baseline remains that such an agreement will be achieved, but the exact timing depends on the amount of pressure placed tonight as well as ECB willingness to tolerate ongoing increases to ELA funding. [This week] a small 500mio EUR increase to the ELA cap was granted, with accelerating deposit outflows in recent days likely further reducing the liquidity buffer available to Greek banks.
The second component to an agreement requires domestic political approval, with passage through the current ruling parliamentary majority being a pre- requisite for fund disbursement. It is only once legislation has passed through the Greek parliament that funding will be released. If the Greek government signs a deal, the three possible political processes would appear possible, in order of likelihood:
Passage through parliament, with potential opposition support and change in government coalition. This political avenue now seems the most likely as it is the quickest. Parliamentary ratification of an agreement could take place within a few days, with the main source of uncertainty being whether the current ruling coalition remains intact. Out of a 12 MP ruling majority, reports suggest a range of 10-40 MPs expressing strong dissatisfaction with the current state of play. Minister Nikos Pappas, one of the PM's closest associates, last week explicitly stated that the government would impose a three-line whip on any parliamentary vote, and the Prime Minister would likely attempt to ensure that any agreement is pre-approved by the party's central committee ahead of a parliamentary vote. With the track record of the current parliamentary majority exceptionally short however, it remains very difficult to assess the odds of parliamentary success. The need for opposition support - possibly in exchange for a change in the government coalition - would seem a likely outcome.
Referendum. A successful referendum would provide the Prime Minister with stronger political backing to pass an agreement through parliament, increasing the odds of ruling party support. However, this political avenue would require at least two weeks as well as requiring the prime minister's implicit backing. Absent such “reluctant support”, it is unclear if the referendum would be a success. It is also unclear whether a referendum could materialize before the end of June, when all IMF payments would be due, and as a result whether European creditors (and the ECB) would be willing to extend the existing program (even without disbursements) under such uncertainty.
Early election. A number of senior SYRIZA party officials have over the last few days suggested that an agreement may trigger an early general election. This is likely a means of pre-emptively exerting pressure on ruling party MPs, who in the event of withdrawing support from the government would be unlikely to be included in the party's new electoral list. An early election would be possible, but the least likely: the PM will likely be able to pass an agreement through parliament with opposition support, in turn generating strong incentives for a shift to a more moderate coalition within the existing parliament rather than a new electoral campaign following a painful compromise with European creditors. This notwithstanding, financial stability under an early election could only be ensured if some disbursements have materialized ahead of time accompanied by ongoing ECB financing of Greek banks. This itself will likely be conditional on passage of an agreement through parliament before a general election is called.
Note the last bolded passage above: "...the PM will likely be able to pass an agreement through parliament with opposition support, in turn generating strong incentives for a shift to a more moderate coalition within existing parliament rather than a new electoral campaign following a painful compromise with European creditors." That translates to this: Tsipras accepts creditors' demands and enough Syriza 'radicals' relent for the PM to pass the deal through parliament effectively transforming the party into a more moderate political position.
Again, that outcome remains the end goal for the troika. Creditors will force Tsipras to concede on most (if not all) of Syriza's mandate and the PM will then exert similar pressure on party hardliners until the deal is sealed and Syriza is effectively no longer Syriza.
After that, the only question will be how the Greek populace responds.
