Greece Looks To Trade Concessions For Writedowns As Standoff Continues

Things took a turn for the worst in talks between Greece and creditors two Fridays ago, when Alexis Tsipras delivered a speech to parliament that, in the eyes of European Commission President Jean-Claude Juncker, did not fairly represent creditors’ position. Juncker took the speech as something of a personal insult given that he had spoken with Tsipras earlier in the week in what was billed as a cordial and productive meeting. Juncker refused to take a phone call from the Greek PM the following day.

A G-7 meeting in Germany last Sunday produced a few token comments from various world leaders and Greece responded by submitting a half-hearted set of counterproposals midway through the week — EU officials called the proposals “not serious.” Juncker then proposed a deal that would have allowed Greece to defer pension cuts if it agreed to implement offsetting reductions in military spending, but the IMF did not agree to the compromise. A day later, Christine Lagarde sent her negotiating team back to Washington and Europe gave Greece 24 hours to come back with a draft agreement that included pension cuts and a VAT hike. 

A little more than 24 hours has now passed and although there have certainly been no breakthroughs, Tsipras and his negotiating team are in Brussels this weekend to try and secure some manner of funding that will allow the country to avoid a default to the IMF on June 30. Preliminary reports suggest Tsipras may be set to make painful concessions if it means creditors will agree to write down some of their existing Greek debt. Reuters has more:

Greek Prime Minister Alexis Tsipras said he was willing to accept unpalatable compromises to secure a deal with international creditors, provided he gets debt relief in return, something that Germany refuses to countenance.

 

With Greece heading towards possible default and bankruptcy, he told his negotiating team before it took a counter-proposal to Brussels that without debt relief he would say "no" to any settlement with the EU and IMF that isolate his country from the rest of Europe..

 

Greek ministers arrived in Brussels on Saturday to resume negotiations with international creditors on a cash-for-reforms deal that ended in stalemate on Thursday.

 

The counter-proposal offering concessions on budget issues is designed to break the deadlock that is threatening Greece's future in the euro zone..

If this proves to be accurate, it looks as though Tsipras may be planning to deflect criticism from party hardliners and voters by claiming that Athens only conceded to creditors’ demands once it was promised debt relief. It’s also possible that Tsipras will be able to convince the European Commission and the ECB that without writedowns, the IMF will be unwilling to participate, something that Angela Merkel views as a serious impediment to a workable deal. 

"If we have a sustainable solution, regardless of how difficult the compromise is, we will bear the burden because the only criteria are exiting the crisis and the bailouts," a government official quoted Tsipras as telling the ministers on Friday night before they headed to Brussels.

 

Tsipras used the term "sustainable solution" to refer to a long-standing demand for large parts of Greece's mountainous debts to be written off - something he believes is vital if the Greek economy is to start getting back on its feet after a five-year depression.

At the same time, Greece effectively owes some €64 billion to Germany, and any suggestion that the money won’t be paid back will serve to further incense FinMin Wolfgang Schaeuble and lawmakers loyal to his position on Greece. Further, the German public, three-quarters of which oppose extending more aid to Greece, would likely be staunchly opposed to taking a multibillion euro loss. 

Much of that debt is owed to Germany, the biggest contributor to Greece's 240 billion euro bailouts. Any acceptance by Merkel that the money might never be paid back would almost certainly create uproar among the country's politicians and taxpayers.

Merkel is thus facing a lose-lose scenario. The Chancellor views keeping Greece in the euro as critical to maintaining the balance of power between Russia and Europe, even if a ‘Russian pivot’ on the part of Greece would be more symbolic than anything else.

However, if preserving the idea of euro indissolubility ends up requiring debt forgiveness, lawmakers and the public alike could turn against the Chancellery. In short, Merkel may be forced to choose between two outcomes that each have the potential to negatively impact how history remembers her tenure as Europe’s most important political figure.

As for the chances of a messy EMU exit, Varoufakis figures that's about as likely as armegeddon:

"As a former statistician, I will never consent to the notion that there is a zero probability event. It is also possible that a comet will hit planet Earth ... (but) I don’t believe that any sensible European bureaucrat or politician will go down that road.”

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