Talks between Greece and creditors collapsed on Sunday after Athens once again refused to compromise on the pension cuts and VAT hike the troika insists are necessary if the country is to receive the final tranche of aid from its second bailout program.
We noted yesterday that the charade is hardly over as Greek PM Alexis Tsipras knows he can continue to bluff for a few more weeks. Even in the event Greece misses its June 30 payment to the IMF, Christine Lagarde would need to muster the political will to send a failure to pay notice to the IMF board, at which point Athens would be formally in default and cross acceleration rights for the country’s other creditors would trigger. But Lagarde has considerable discretion on the default notice and can delay it for at least 30 days. Between this and the fact that a critical payment to the ECB is still more than a month away, we suggested that the brinksmanship was far from over and that the new ‘deadline’ would be Thursday’s meeting of EU finance ministers in Luxembourg.
On Monday the usual back-and-forth between the IMF, Greece, and EU officials continued with IMF chief economist Olivier Blanchard insisting that Greece must implement changes to pensions and the VAT in order to hit (reduced) budget surplus targets while EU creditors should reshuffle Greece’s payment schedule, reduce interest rates on the country’s debt, and, if push comes to shove, writedown Greek bonds:
On the one hand, the Greek government has to offer truly credible measures to reach the lower target budget surplus, and it has to show its commitment to the more limited set of reforms. We believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the VAT – involving a widening of its base – and a further adjustment of pensions. Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners. We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment.
On the other hand, the European creditors would have to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability.We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.
As for Greece’s European creditors, the focus continues to be on Greece’s perceived unwillingness to accept economic realities. Here’s Valdis Dombrovskis, European Commission vice president for euro policy:
"In the end, this is not the kind of situation where you can have a mechanical agreement for some kind of numbers, where you meet in the middle or something similar. In this event, it’s most important to have a clear exit strategy, how Greece will renew financial stability and how renewed financial stability will return to economic growth.”
In Germany, where Chancellor Angela Merkel is fighting to preserve the last vestiges of patience among lawmakers in the face of staunch opposition from FinMin Wolfgang Schaeuble, the mood is becoming increasingly hostile with Merkel’s party whip Michael Grosse-Broemer saying “a Grexit must be factored in if the Greek government doesn’t do what it’s long been called upon to do,” and Vice Chancellor and Economy Minister Sigmar Gabriel accusing Greece’s “game theorists” of “gambling” with Europe’s future and noting that “repeated apparently final attempts to reach a deal are starting to make the whole process look ridiculous.”
For his part, Greek FinMin Yanis Varoufakis reiterated that Athens would not compromise on pension reforms and a VAT hike. In an interview with Bild, Varoufakis flatly rejected a VAT increase, claiming that “the higher these taxes, the less people will pay them. They would then feel justified not paying.”
As for Tsipras himself, the PM is taking a cue from these pages, hinting at the troika's use of the Greek talks as a way of sending a political message to Podemos and other sympathetic parties and reminding the world that Greece, more so perhaps than any other country, has a commitment to defending democracy because after all, it is the birthplace of Western democratic ideals:
One can only suspect political motives behind the institutions’insistence that new cuts be made to pensions despite five years of pillaging by the memoranda. The Greek government is negotiating with a plan, andhas presented nuanced counterproposals. We will patiently waitfor the institutions adhere to realism. Those who perceive our sincere wish for a solution and our attempts to bridge the differences as a sign of weakness, should consider the following: We are not simply shouldering a history laden with struggles. We are shouldering the dignity of our people,as well as the hopes of the people of Europe. We cannot ignore this responsibility. This is not a matter of ideological stubbornness. This is about democracy. We do not have the right to bury European democracy in the place where it was born.
The risk now is that by the time the shouting, bluffing, and finger-pointing finally gives way to realpolitik, Greeks may be living in what is effectively a third world country. As documented here extensively, the Greek economy is teetering on outright collapse, and irrespective of how long politicians on both sides are willing to redefine their own, self-imposed deadlines, a crisis of confidence on the ground in Greece could plunge the country into a state of emergency before EU officials have time to intervene. On that point, we'll close with the following from Reuters which suggests that there are at least some people in Europe who understand the meaning of the word "urgent":
The European Commission needs to make plans for a 'state of emergency' in Greece from July 1 if Athens does not reach an agreement with its creditors, Germany's EU Commissioner Guenther Oettinger said on Monday in Berlin.
"We should work out an emergency plan because Greece would fall into a state of emergency," Oettinger, who is also a senior member of Chancellor Angela Merkel's Christian Democrats said, citing the need to ensure access to energy and medicine.