Greece: Too many chefs spoil the broth?

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I commented on Twitter on Saturday morning that the “Greek crisis is as much about personalities as it is about cash: Tsipras, Varoufakis, Draghi, Dijsselbloem, Lagarde, Merkel, Tusk, Juncker, Putin, Obama”.  My view was reinforced by former US Treasury Secretary Larry Summers’ argument in a Financial Times article posted Saturday afternoon that “Greece is no longer about numbers. It is about the high politics of Europe”[1].

Of course the numbers matter. After all Greece has about € 320bn of debt outstanding but in the greater schemes of things that’s pretty small – about 2% of US government debt to put it in context. The €7.2bn outstanding from the bailout package which all parties have been negotiating for weeks and has caused much market nervousness is equivalent to 0.05% of the eurozone’s GDP. The European Commission, ECB and IMF – aka the Troika – has argued that beyond the pure arithmetic it’s about setting positive precedents, establishing an equal playing field for all eurozone member states and the Greek government adhering to the rules. But it’s arguably also about policy-makers defending their positions and fighting for an optimal outcome, with all the emotions this entails.

The sheer number of individuals and institutions involved in trying to broker a deal and keep the eurozone dream alive has muddied the waters, complicated and drawn out negotiations and increased the risk of a “miscalculation”.  With this in mind I have compiled a chart of the main players in this Greek saga and their stance (see Figure 1). The shading around the boxes is relative to the individual or institution’s willingness to compromise during these Greek negotiations, appreciating of course that that there’s a degree of subjectivity (a dark shading indicates little willingness to compromise).

The past 24 hours have shed some hope that European negotiators and the Greek government are inching closer to an agreement, although the details remain vague at best. European Union leaders are holding a regular meeting on Thursday but 48 hours is a long time in the life of Greek debt negotiations.

It’s unlikely that Greece will benefit from another round of substantial debt relief but the Troika may well release the outstanding €7.2bn ahead of Greece’s €1.6bn payment to the IMF which is due by 30 June. The Troika may also throw in a few more sweeteners – including modest debt relief – but the Greek government will have to commit and deliver on serious pension, taxation and fiscal reforms. This is the core scenario which I described earlier this year in Greece Last Chance Saloon and Fifty Shades of Greece and I am sticking to it (for now at least).  There seems to be just about enough good will left in the tank for Greece to be given a lifeline.

[1] To be clear, I very much doubt the eminent Mr Summers, who talks from a knowledgeable position having sat at one of the highest chairs in US politics, saw my tweet. His full article can be found here: Greece is Europe’s failed state in waiting (Financial Times 20 June 2015)

olivier desbarres

Figure 1: Who’s who in Greek negotiations

Failure to reach such an agreement may force Greece to default on some of its obligations and put in motion an eventual exit from the eurozone and potentially the EU. While the ECB has publicly said the eurozone would survive a Grexit, there is no precedent for such an event and the short, medium and long-term consequences are ultimately anybody’s guess.

Regardless of the outcome, the key players are likely to remain at the forefront. If a deal is reached, the Troika will continue to monitor and assess Greece’s progress, with input from Greece’s team and major creditors including Germany and France. I would go a step further and argue that unless Greece is granted significant debt relief – either in the form of a debt cancelation, hair-cut or maturity-lengthening – the events of the past few months will play themselves out again. At present, Greece is seemingly borrowing money it can’t repay to repay debt it can’t repay. The answer put forward by creditors is for the Greek government to run large primary budget surpluses but that’s far easier said than done without material economic growth. If Greece defaults, creditors – including the IMF, ECB, eurozone countries and private sector – will be lining up and G8 leaders, including Obama and Putin, will step out of the shadows and come to the fore.
Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.


[1] To be clear, I very much doubt the eminent Mr Summers, who talks from a knowledgeable position having sat at one of the highest chairs in US politics, saw my tweet. His full article can be found here: Greece is Europe’s failed state in waiting (Financial Times 20 June 2015)

Sources

Fig 1 – www.olivierdesbarres.co.uk

 

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