Observers have taken an almost prurient fascination with some sketchy
details of the contingency plans then Finance Minister Varoufakis had developed
for Greece if it had been forced to leave the monetary union.
They are hardly surprising in substance.
It was quite clear that gaining control of the central bank's
reserves was an essential step. We had warned that replacing the
central bank governor with an ally of the Syriza government was a logical step
on the escalation ladder. A separate or parallel payment system would
have also been necessary. The precise details are shaped by the
particular institutional and technological idiosyncrasies of Greece.
There are three more important issues from which the focus on "Plan
B" distracts us. First is the realignment among the
creditors. In particular, the IMF's insistence on debt relief brings it
to loggerheads with Germany and several other eurozone members.
The expiration of the second aid program at the end of June also signaled
that end of the IMF program that would have run through March 2016.
The IMF formally canceled its roughly 28 bln euro program, having only
disbursed about 12 bln euros. At the end of last week, Greece requested
another IMF package, which it had to do as part of its application for a new
three-year loan facility from the ESM.
If the European creditors insist on the IMF's involvement from day one of
the new package, it will bring forward the debt relief discussion.
This is obviously what Greece would like. However, several European
countries are unwilling to discuss debt relief until it can be verified that
Greece is implementing the reforms it promised. The IMF could wait until
after the first review, which could take place in the Oct-Nov period unless
there are snap elections that could disrupt the time-frame.
The second and arguably the most important point now that the
negotiations have begun is whether Greece will be asked to pass additional
reform and austerity measures. Recall Greece passed two important
omnibus bills that essentially committed the Tsipras government to implementing
the prior governments’ commitments and more. These were seen as
prerequisites to beginning negotiations for a third package and the 7 bln euro
bridge loan.
Greek negotiators argue that these measures should be sufficient to free
up the first tranche of aid. Recall aid has been cut off since last
summer. The previous government, led by New Democracy's Samaras
failed to implement the accord. Syriza's election was not the cause of
the assistance freeze but may have been the effect.
The passage of the various measures after the nerve -fraying referendum
in which the Greek people voted to reject the creditors' demands has weakened
the Syriza coalition. The left-wing of the government has been purged,
and Tsipras has had to rely on opposition votes to pass the measures. In
some ways then he has become a minority government. Alternatively, with
the opposition in disarray (new head of PASOK and leadership contest in the New
Democracy Party); Tsipras leads a unity government of sorts.
As the most popular politician in Greece, Tsipras, who is tasked with
implementing a program he does not believe in, could be re-elected.
The point, however, is that if the creditors demand additional measures as the
condition of aid, the political situation could reach a breaking point, which
would only slow the reform efforts and weaken the economy further.
The creditors arranged a tight time frame to keep the pressure on
Greece. The 7 bln euro bridge loan merely provided to service Greece
debt that had come due. It does not cover the 3.2 bln euros owed to the
ECB on August 20. Greece also faces interest payments and a small loan
repayment to the IMF next month.
The third issue involves Greek banks, markets, and capital controls.
Greek banks have re-opened, but capital controls remain in place. At the
end of last week, some of the exceptions and rules were tweaked mostly to help
facilitate external payments by companies and individuals (including tourists
and students). The Greek stock market and other financial markets will
likely open before the end of the week. New rules and restrictions will
be announced. The ban on short-selling has been extended through August
3. Even when the stock market re-opens, it is possible that
trading in Greek banks is not allowed.
The plight of Greek banks is widely recognized, even though they managed
to raise about 8 bln euros last year. Deposits have fled. The
latest figures suggest that some 8 bln euros or 6% of Greek deposits were
removed from the banking system last month. Non-performing loans of
Greece's top four banks stood at 35% at the end of last year, and could only
have deteriorated further this year.
Greek banks appeared to have sufficient Tier 1 capital (12.8%), but a
good part of this is DTA (deferred tax assets). These are tax
credits that can be used to offset future profits, but are hardly funds that
can be used. The cost of Greek bank recapitalization hinges to a large
extent on the DTAs will be retreated.
Greece has approved the Bank Recovery and Resolution Directive.
It allows for the bailing in private creditors and depositors (in excess of
100k euros) before government (taxpayers') funds are used. It is to start
at the beginning of 2016. Varoufakis' replacement at the Greek
Finance Ministry, Tsakalotos has indicated bank recapitalization will begin
this year. Many recognize the bailing uninsured depositors may be
counter-productive.
Much of those uninsured deposits are believed to be the working capital
of small and medium size Greek businesses. Penalizing them would
likely produce further deterioration of the loan books. Nevertheless, some
countries, including Germany, are reportedly pressing for such action as the
condition for recapitalizing the banks. There is some debate whether the
ESM should take an equity stake too.
There are two other issues that many, including Varoufakis, are still
struggling to get their heads around. First, there is a clear link
between solvency and sovereignty. The more insolvent a country is, the
less sovereignty they have. Greece is insolvent. It has lost much
of its sovereignty. When Varoufakis and others complain about the
encroachments into Greek sovereignty, it shows they fail to appreciate this
critical link. Greece is being forced asked to do things that
other countries have a choice about, like whether shops should be open on
Sunday, or when to pass the Bank Recovery and Resolution Directive. It
also has to accept EU officials embedded in numerous ministries.
Second, Varoufakis and his many sympathizers fail to appreciate that not
all of Greece's problems can be blamed on Germany, the creditors, or the euro.
Similarly, many of Varoufakis' critics fail to recognize any role whatsoever of
external factors. The role of the oligarchy in Greece, or the
prevalence of rent-seeking behavior and tax avoidance cannot simply be
dismissed as a German plot. Varoufakis and the Syriza fundis talked tough
but did nothing to address them even in the most preliminary way.
There are numerous measures that
Greece can take to make it easier to cope with the structural rigidities posed
by the surplus countries in EMU failing to offset the restrictive course of the
deficit countries. Ultimately,
creating the conditions for sustained growth arguably will do more to help
Greece than all the complaining about EMU’s systemic defects or the creditors’ hypocrisies.
Greece: Thank You Sir, May I Have Another?
Reviewed by Marc Chandler
on
July 28, 2015
Rating:
Reviewed by Marc Chandler
on
July 28, 2015
Rating:
