Greek Default, Deposit Blocks, New Government "May Be Necessary" To End Impasse, Goldman Says

Over the past several days it’s become increasingly clear that the endgame in Greece will involve some manner of political shakeup in Athens. 

As we’ve said all along, the troika wants — no, needs — to force Greek PM Alexis Tsipras into conceding Syriza’s election mandate or risk emboldening leftist movements across the periphery. The necessity of remaining resolute when it comes to demanding complete surrender from Athens was made all too clear when recent regional and local elections in Spain showed a groundswell of support for Podemos and many progressive, anti-austerity candidates (we’ll leave aside the fact there was never any real ‘austerity’ in the first place). 

Greece and creditors missed a self-imposed Sunday deal deadline and, in what seemed like an admission that discussions have become intractable, Tsipras penned a lengthy statement over the weekend which blamed creditors for the stalemate and warned that democracy in Europe was threatened by those who wish to create a two-tiered EMU wherein weaker nations are essentially governed from on high by the institutions and EU paymaster Germany. Additionally, Syriza’s far-left radicals look set to split with Tsipras, forcing a government reshuffle in order to get a deal passed through parliament. 

Today, Goldman is out reinforcing all of the above noting that in the end, it simply is not possible for Syriza to keep its election promises and secure a deal with the troika.

Via Goldman (on the political aspect):

On the one hand, the European authorities are committed to a framework based on three key principles:

  • Retaining the Euro requires further economic adjustment in Greece;
  • To the extent that this adjustment entails further financial support (which is self-evident given upcoming obligations), that support will only be provided on the basis of conditionality.
  • In order to assess compliance with such conditionality, external oversight of the Greek economy is required.

A departure from these principles would not only represent an overturning of the existing process and risk fuelling moral hazard in Greece and elsewhere. It is also simply politically unacceptable in other Euro area countries (those that have made painful economic adjustments in the past, those that face domestic political challenges from populist parties, and those that underwrite the financial risks associated with further support). And a third programme requires unanimity across Euro area member states.

 

In short, even if the labels change, a third programme for Greece to facilitate the economic and financial adjustments needed to sustain its membership of the Euro area entails a new memorandum and a continuation of the troika.

 

On the other hand, the Greek government was elected on a platform that promised continued membership of the Euro area but without the austerity, adjustment and oversight that came with the troika programme. Departing from this position requires a change in the political mandate on which the Greek government operates…

 

Euro exit is a political decision. For sure, the Greek authorities could decide to exit in a unilateral manner. But the current Greek government has no mandate to do so: if it announced an intention to leave the Euro area pre-emptively, in our view the government would likely fall. Moreover, there is no process for Euro exit defined in the governing European treaties: the practical and legal challenges could not be resolved overnight…

 

Viewed first through a political lens, this situation serves to clarify the choice facing the Greek economy. Under the maintained assumption that the European authorities do not give way on their three key principles listed above, the intensification of the liquidity shortage will demonstrate that the platform on which the current Greek government was elected is simply infeasible: the Greeks cannot “have their cake and eat it”, retaining the Euro but not implementing adjustment. A hard choice has to be made between (a) Euro exit and (b) adjustment to remain part of the single currency.

 

Making that choice entails finding a new mandate to govern. This will have to be sought from the electorate, implying a new government, new elections or a referendum (or various combinations of the three).

And here’s Goldman on the harsh economic realities facing Greece and its citizens:

The domestic sector with an immediate, direct exposure to the liquidity squeeze is the government and – by implication – those segments of society that rely on it: public sector workers, pensioners, government suppliers and contractors. While the lattermost are feeling the liquidity squeeze as the government falls into arrears on its contractual payments, public workers and pensioners have maintained a privileged position.

 

Indeed, it is the explicit policy of the Greek authorities to prioritise paying public wages and pensions ahead of meeting external financial obligations.

 

While the government has access to liquidity, this privileged status confers a form of seniority to the claims public workers and pensioners hold on the government. And unsurprisingly, those parts of society that benefit from such seniority prefer to maintain the status quo rather than accept an adjustment programme (that is likely to involve pension, job and/or wage cuts for public employees).

 

But as the liquidity squeeze intensifies and cash reserves are exhausted, the seniority enjoyed by pensioners and public sector workers evaporates. Being first in the queue does not help when there is no cash left. At that point, the claims of pensioners and public workers become pari passu with other claims on the Greek government.

 

The implications of this pari passu status can take several concrete forms. The government may pay pensions using IOUs (‘scrip’). Such bearer claims on the government may circulate in a form of parallel currency. But they will trade at a discount to Euro banknotes if the government is unable to redeem them in ‘hard’ currency – as would be the case in the event of technical default and exhaustion of cash reserves.

 

Alternatively, the government may pay public workers with cheques drawn on Greek banks. But with the banks lacking access to liquidity, those cheques cannot be cashed – bank deposits would have to be blocked.

 

Either way, the claims of pensioners and public sector workers on the government are worth less than their par Euro value…

 

But – as the preceding discussion emphasises – the ongoing negotiations between Greece and its official creditors are intensely political. And forward-looking economic rationality is not characteristic of such interactions.

 

Not only is it possible that we may need to see technical default and deposit blocks in order to come to a new programme, it may be necessary to do so in order to break the current impasse in negotiations.

As a reminder, Greece’s pension obligations amount to a greater share of GDP than any other nation in the eurozone:

Meanwhile, Jean-Claude Juncker’s official spokesperson, Mina Andreeva indicates that Brussels was not amused with Tsipras and his Hemingway references:

And it now appears there's further dissension within Syriza as the radial faction doesn't seem to think the appointment of a pro-bailout representative is appropriate under the circumstances. 

Via Reuters:

Greek Prime Minister Alexis Tsipras faced a backlash on Sunday from his leftist party lawmakers over the government's pick for the country's representative at the International Monetary Fund, the latest issue to deepen divisions in the ruling party.

 

The rift was triggered by the choice of Elena Panaritis, a member of Greece's financial crisis negotiating team and parliamentary deputy for the center-left PASOK party from 2009 to 2012, to replace Thanos Katsambas at the IMF.

 

In a letter sent to Tsipras on Sunday, some 40 deputies from his anti-bailout Syriza party opposed Panaritis' appointment and asked for it to be withdrawn. They said her views conflicted with the party's program since she held a post at PASOK when it supported bailout policies.

 

"A prominent representative of bailout policies cannot represent the government," the lawmakers said in a letter published on a Syriza-affiliated website. "It's not a symbolic but a political issue. It's a wrong decision and we ask that it is taken back."

As if on cue:

Greece’s appointed representative at the IMF Elena Panaritis says in e-mailed statement that she can’t accept post amid negative reactions from Syriza lawmakers.

We'll close with a quote from Germany, where the political will to negotiate is quite clearly exhausted. From German spokesman Steffen Seibert:

"Summarized in a sentence: Greece must agree a comprehensive reform package with the three institutions."