Greece Refuses To Blink; EU Says Noncompliance "Not An Option"

Months of tense negotiations between Athens and creditors came to a head on Thursday when the IMF (which at this point is just going through the motions after telling the EU it would not participate in a third Greek program) sent its lead negotiators back to Washington.

EU officials, who have long contended that without IMF participation there can be no solution for Greece, followed the Fund’s lead, stepping up the pressure on Athens and telling Greek PM Alexis Tsipras that his government has 24 hours to submit a proposal that includes pension reform and VAT hikes. 

To be clear, that’s tantamount to saying Tsipras has one day to abandon Syriza’s electoral mandate and will come as no surprise to those who frequent these pages, as we’ve said for months now that come hell, high water, or "Grimbo," the EU is going to extract its pension cuts and VAT hikes from Tsipras, and not because anyone seriously thinks it will make a difference in terms of putting the country on a 'sustainable' path, but because the EU simply cannot afford for Syriza sympathizers in more economically consequential countries like Spain to get any ideas about rolling back austerity (of 'fauxsterity' as it were) and using EMU membership as a bargaining chip. Here’s a bit of color on the pension issue from Bloomberg:

For creditors, the pension system is still too generous. For the Greek government, it’s a system struggling to cope after five years of recession and dwindling contributions in a nation with the European Union’s highest unemployment. In the first quarter, the rate was 26.6 percent overall and 30.6 percent for women.


Creditors are asking Tsipras to implement reforms agreed to and deliver savings of as much as 0.5 percent of gross domestic product this year and 1 percent next year in part by immediately clamping down on early retirees. They also want supplementary pension funds — lowered about 5 percent last year — to be financed by contributions, not the state budget.


In parliament on June 5, Tsipras called the proposals from creditors “unrealistic” and said no lawmaker could agree to demands such as removing a stipend from the lowest-paid pensioners. Tsipras has agreed to merge funds to cut costs and close loopholes that allow early retirement.


He blamed five years of austerity for weakening the system, saying fund reserves fell by 25 billion euros through the 2012 debt swap and high unemployment. In the last five years, pensions fell as much as 48 percent, Tsipras said, while 45 percent of recipients get pensions that are below the poverty threshold.


In 2012, Greece spent more relative to GDP on pensions than any other EU nation. The 17.5 percent of GDP it spent compared with the EU average of 13.2 percent, according to the most recent Eurostat figures.


A wave of reforms begun in 2010, in the months after Greece agreed the terms of its first bailout with the European Commission, International Monetary Fund and European Central Bank, scaled back payments, introduced means-testing, raised the statutory retirement age and calculated pensions over the entire working career.


The result was Greece was able to move from having the weakest pension system in the world in 2011, according to Allianz Asset Management’s pension sustainability index, to cede that place to Thailand, Brazil and Japan in 2014.


Greece chased employers and employees to pay contributions. Bank of Greece Governor Yannis Stournaras said on June 2 that public pension expenditure is set to decline by about 1.9 percent of GDP by 2060, the fifth best performance in the EU, 


Still, the recession, with rising unemployment and a wave of company closures, has hit contributions.


(Greece CDS overlaid on the Greek public's bargaining stance preference)


“The program applied caused greater problems in terms of loss in contributions than the sum of money collected through the program itself,” said George Simeonides, a board member at the Hellenic Actuarial Authority, which monitors the pension system. “In some cases the cure was worse than the disease.”


Greece’s debt restructuring cut the nominal value of the bonds held by pension funds by 8.3 billion euros, Simeonides estimates. The funds may take further real hits when they’re forced to sell their holdings to pay pensioners, he said.


As you can see, further pension cuts will indeed be quite painful and there certainly seems to be something to the argument that calculating how “generous” a program is as a percentage of GDP can be somewhat misleading when GDP has contracted by a quarter over the course of just five years. 

But again, that doesn’t matter.

This is more about making a point than it is about an honest assessment of economic realities and as we discussed late on Thursday, EU creditors may now be concerned that Tsipras’ recent behavior — including a scathing op-ed and impassioned speech to parliament — may indicate he’s leaning towards siding with Syriza party hardliners, and that is simply unacceptable to Brussels and also to Germany, where economy minister Sigmar Gabriel has given up all pretenses that this is about Greece and not about Spain:

If Greece should leave the euro it may spark a wave of political separatism in the EU, German Economy Minister Sigmar Gabriel says today in speech in Munich at Ifo institute.


“As before, I hope that in these somewhat final days common sense prevails. If it comes to it that Greece can’t be kept in the euro that would be something of a disaster -- for Europe too:” Gabriel


An exit “wouldn’t just be much more expensive than many realize today -- not just financially -- for it would change Europe’s aggregate structure.” “Grexit today, Brexit tomorrow -- the debate about Catalonia and others:” Gabriel

EU officials are also beginning to be a bit more transparent about the fact that this was never really up to Tsipras in the first place. That is, even using the term “negotiations” might have been a bit disingenuous from the start. There are two options for the embattled PM: 1) become a technocrat puppet, or 2) attempt to stick an impossible dismount from the EMU balance beam knowing that the slightest slip-up could trigger political and social instability and risks plunging the country into chaos. For anyone still not convinced that this is the case, just ask Eurogroup President Jeroen Dijsselbloem: 


For her part, Angela Merkel is doing what she can to rally support behind the Greek cause. Why? Because she, perhaps more than any other EU official, fears the geopolitical fallout from a Greek exit. Unfortunately for the Chancellor, the political will is quickly fading in Berlin, thanks in no small part to FinMin Wolfgang Schaeuble who was finished with the Greeks long ago and who has now managed to rally the support of German lawmakers who are increasingly frustrated with Merkel’s bargaining stance. 

And it’s not just German MPs. The public, although largely ambivalent to whether Greece stays or goes, is overwhelmingly opposed to further concessions:

Poll finds 51% of Germans want Greece out of the euro area, compared with 55% in favor of keeping Greece in the euro in similar poll at the start of the year, German broadcaster ZDF says.


41% want Greece to stay in euro in poll published today


70% oppose further concessions to Greece by the European Union.


65% expect limited or no economic harm to Germany from a Greek exit.

Having said all of this, it's worth reiterating what we said on Thursday, namely that through it all, Tsipras likely believes he can buy a bit more time in order to cement an agreement with Syriza party hardliners. Accepting a 'deal' without first ensuring it can pass the Greek parliament could be a political disaster and may be followed, in relatively short order, by social upheaval. That is aggravating the troika in the interim is preferable to trying to push an extremely unpopular deal through parliament without first securing support. Underscoring this point is the following headline from Friday morning:
Well, yes, they probably will accept pension and wage cuts. But not yet.

Because why should Greece care that creditors are a bit more angry today than they were yesterday? The payment schedule is the payment schedule and unless the IMF decides to effectively execute the Greeks by scrapping the 30-day greace period (and thereby immediately triggering accelerated payment rights for other creditors), Athens can effectively drag this out for some time.

We'll close with the following rather amusing commentary from UniCredit's Erik Nielsen, who spoke to Bloomberg on Friday:
“I really don’t believe they have either the political or technical capability of starting their own currency. Money needs to be a commodity of trust, and I don’t think they have the trust in the population. I’ve never seen anything so completely ridiculous, frankly speaking, from a debtor country in the way they approach it.”