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Is SN 4070/15 Greece’s 1441 moment?

Walking The Plank or Punishing Scapegoat

July 23, 2015 Comments (0) Views: 1926 Homepage

Greece’s last chance. No, really

To be fair to Alexis Tsipras, he isn’t the first Greek Prime Minister who would rather not have to deal with the International Monetary Fund (IMF). Actually his predecessor – Antonis Samaras – didn’t much care for the IMF either. If you can remember this far back, it was as late as October last year that Mr. Samaras was wondering aloud about the possibility of Greece actually exiting its IMF programme early. But as with death and taxes, leaving the clutches of the IMF is easier said than done, and particularly when that might not suit other parties to the negotiations (Germany, for instance). In fact, little than a month later, in November 2014, negotiations between Greece and the IMF had broken down completely: try as they might, the Greek government would not be let out of the IMF’s grasp. Within weeks, Mr. Samaras had failed to win backing for his rather hastily proposed new candidate for President (largely a ceremonial post) which, under the rules, meant a General Election on 25th January: an election which Mr. Tsipras duly won.

The real #ThisIsACoup may have already taken place

In other words, to anyone who thinks that #ThisIsACoup is only about the Institutions’ distaste for the current Syriza government, the real coup might well have taken place nine months earlier, with respect to Mr. Samaras (see also ‘Eurozone QE & the Greek election: hidden links’, The Top Note, 18th February 2015).

Syriza is not the first Greek government to dislike IMF involvement in its affairs

As the new Syriza government settled into office in the last week of January, having won the General Election, Eurogroup President Jeroen Dijsselbloem paid a courtesy call. But it quickly went wrong when, in the ensuing press conference, new Finance Minister Yanis Varoufakis pronounced his distaste for the time-consuming and obstrusive manner in which Greece’s negotiations with its creditors were being conducted. “You’ve just killed troika”, said Mr Dijsselbloem, reportedly, as he made a swift move for the exit.

As the subsequent negotiations dragged out, Greece maintained its insistence on changing the modus operandi of the negotiations. Not for the first time, Greece reserved its harshest criticism for the IMF. Indeed as Prime Minister Tsipras said in his televised address announcing the referendum on 26th June:

“These proposals prove the fixation, primarily of the International Monetary Fund, to tough and punitive austerity.”

Days later, at the end of June, Greece went into arrears with the IMF. To be fair to me, I thought they might (‘Why Greece could still default on the IMF’, The Top Note, 24th June 2015). I even thought it might be a conscious choice by Greece and at least some of its creditors to allow the arrears to happen, as part of a bigger process of gradually ratcheting up the pressure on the system to come to a deal without actually pushing it over a precipice. In fact this is more or less exactly what former Finance Minister Yanis Varoufakis has had to say on the process, now that he is no longer part of it. In short, Greece fell into arrears with the IMF on 1st July not because it had no choice, but as a conscious choice.

Somewhat later and more acrimoniously than expected, a Greek deal was done

So I was right about Greece going into arrears with the IMF. And I was right that the only deal that could and would be done, in the end, was ‘Extend & Execute’, where Greece would executes significant new reforms in return for future debt relief (‘Greece: Is it time for “Extend & Execute”?’, The Top Note, 25th June 2015). But it did take a week longer to resolve the situation than I previously thought and – along the way – the risk of an abrupt Grexit seemed, for a while at least, much more threatening.

The troika is back, though, and in Athens too

But at the end of the day, and with a new ‘agreement’ now in place, each of the three ‘institutions’ is still there: The European Commission, the European Central Bank, and even the IMF. We might as well call them the Troika again, actually. They’ll be taking up residence in Athens again, if they haven’t done so already, and nothing much is going to come before the Greek parliament without their prior review and approval.

In fact, continued IMF involvement in Greece’s affairs appears to have been one of the main stumbling blocks to a final agreement. For a while, it appeared as though Greek might be able to wriggle off the hook via its appeal for a new ESM programme (if you read the ESM Treaty carefully, it just about has enough wriggle room to allow for a programme without direct IMF involvement). But someone among all of the Institutions was having none of it. In fact, as the subsequent Euro Summit statement made clear right at the outset (on page one, no less):

“A euro area Member State requesting financial assistance from the ESM is expected to address, wherever possible, a similar request to the IMF. This is a precondition for the Eurogroup to agree on a new ESM programme. Therefore Greece will request continued IMF support (monitoring and financing) from March 2016.”

Jeroen Dijsselbloem gets tough, and a new term as Eurogroup President

For someone like me who had previously wondered what actual decision-making power it was exactly that Eurogroup President Jeroen Dijsselbloem had, here – finally – was some proof. And seven whole hours later, Mr. Dijsselbloem was duly rewarded for his tough stance on retaining the IMF in the troika with a new term as Eurogroup President, a vote he won with unanimous backing despite the fact that German Chancellor Angela Merkel had previously promised – and I mean ‘promised’ – the post to the Spanish Minister of Finance, Luis de Guindos. Promised? Well, try this for unequivocal:

“When the term of the current [Eurogroup] president is over, we will support the candidacy of Luis de Guindos”

Alexis Tsipras the reformer

Last night, the Greek parliament voted on the latest austerity measures. In the FT, Tony Barber even compared Mr Tspiras’s conversion to reform as akin to the U-turn performed by French President Francois Mitterand in the 1980s when the latter apparently abandoned many of his Socialist leanings in favour of austerity and reform.

Why?

The question, as ever, is why. Why were the institutions so tough on Greece in the latest renegotiation? Why was there no let-up at all in terms of how Greece would have to deal with the institutions in future? And why did Greece agree to it?

There are two answers, I think: concrete undertakings regarding debt restructuring, and the dysfunctional nature of the Troika itself.

Athens’ new guarantees on debt restructuring

First up with soothing new words about potential future debt restructuring in Greece was ECB President Mario Draghi, who had this to say three days after the latest deal was announced:

“It’s uncontroversial that debt relief is necessary, and I think that nobody has ever disputed that. The issue is: what is the best form of debt relief within our framework, within our legal, institutional framework? I think we should focus on this point in the coming weeks.”

Not only that, but Mr. Draghi also offered up the prospect of Greek QE as soon as just a few weeks from now, if all goes well in the meantime.

Not to be outdone, IMF Managing Director Christine Lagarde was quickly on the phone with a French radio station (it was the following morning, actually) to pronounce the need for debt structuring as part of any new IMF programme as being “categorical”. Just in terms of timing, by the way, that new IMF programme Ms. Lagarde talks about would be beginning in March next year.

The dysfunctional troika

As for the survival of the troika, it is most likely the German government that is most insistent on it being part of any ongoing Greece programme, mostly because Chancellor Merkel doesn’t really trust the European Commission to be tough enough on Greece. In my opinion, it explains why Mr. Dijsselbloem was so insistent on continued IMF involvement during all of the recent discussions, and despite the intense pressure to change things. And that’s why he is still the Eurogroup President, Chancellor Merkel’s prior promises notwithstanding.

This really is Greece’s last chance

With the Greek government now apparently in bill passing mode, and with its banks slowly re-opening, you could even be forgiven for starting to be optimistic as regards the prospects for the economy and its long-suffering people.

But there’s one big remaining problem. Read what German Finance Minister Schäuble has said since the latest deal, and read again what ECB President Draghi had to say, and nobody has promised categorically that any such Greek debt restructuring will be done with Greece still inside the Euro zone. Indeed, as Mr. Schäuble has put it on a number of occasions, he sees ‘proper’ debt restructuring within the Eurozone as not permissible. Not only that, but the eight months from now until the beginning of any new IMF programme just happens to be about exactly the amount of time one would need to properly prepare for a new currency.

And that, I think, is now the big question. Greece is going to get its debts restructured, but the big question is the currency in which they are to be denominated. And, should we end up with a new Drachma as of the second quarter of 2016, nobody could say that we haven’t all been warned.

In other words, the coming eight months really is Greece’s last chance to stay in the Euro. And even if everbody does “whatever it takes” within their mandates in the meantime, there remain significant questions regarding whether it will be enough. And I’m yet to be convinced myself.

As ever, as former US President Bill Clinton would likely say: “it’s the economy, stupid”.

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