Greece : Is that it ? The last chance of a deal gone ? No, there's another "last" chance on Monday...

Friday 19th June 2015

Greece : Is that it ? The last chance of a deal gone ? No, there's another "last" chance on Monday...

"My big fat Greek divorce" and "Down but not yet out", The Economist p.13 and p.71

There's no getting away from it today, we have to talk about Greece. Predictably enough, no progress towards a deal was made at yesterday's meeting of Eurozone finance ministers and the frustration verging on bitterness was plain to see. Those who appreciate a good put-down line will have enjoyed IMF head Christine Lagarde's comments about the need to "restore dialogue with adults in the room". Presumably, this normally most serene of characters is still smarting from Greek PM Tsipras' statement that the IMF has been "criminally responsible". Even so, the detrimental effects of the amateurish and provocative antics of Greek negotiators to the goodwill of their counterparts throughout the process should not be underestimated. What did emerge from Luxembourg however was the announcement of another "last chance" meeting of Eurozone leaders on Monday. Not that they've ever been far away, but this puts the politicians rather than technocrats at the front and centre of things and given the political ramifications of failure that may be significant. Since depositors are continuing to withdraw funds from Greek banks faster than the ECB can inject them and some banks may have to close their doors as early as Monday, one could also reasonably argue that it's not a moment too soon.

 Despite the tough talking, we can only guess whether the two sides will actually be prepared to make any concessions that would allow the release of 7.2bn euros in bailout money. Frankly, the difference between them on the level of primary budget surplus that Greece would have to show (i.e.before interest payments) should be surmountable in these circumstances. It is also not impossible to imagine that the creditors might offer some kind of debt relief. But everything would be contingent on Athens introducing radical fiscal reforms that it has so far refused to do, and this remains a huge hurdle to overcome. On political and social grounds, the Syriza party will not countenance the kind of pension cuts and VAT increases demanded by the creditors, whose faith in the ability of the Greek government to do what it promises will also be deeply undermined by their failure to introduce measures to tackle corruption (clientelism, patronage, call it what you will) even though they claimed to embrace the principle.

 Default would not necessarily mean "Grexit", but many on both sides now argue that it would be the logical course. There's a perception that after a brutally difficult period Greece, freed from an enormous mountain of debt, would emerge leaner and stronger and with a devalued drachma that would boost competitiveness. When one hears that, it's worth reminding oneself of what the IMF predicted (and the Economist relates) as the future for the new drachma when faced with a similar crisis in 2012 :

"the forcible conversion of all domestic assets and liabilities to the new currency, which would immediately plunge by 50% against the euro, gutting bank deposits and other savings. As the drachma fell, pushing up import prices, inflation would surge to 35%, while the toll on GDP would be a decline of around 8%. Even the smallest of transactions would be difficult : after the short-lived Czech-Slovak monetary union broke up in 1993, it took six months to introduce new banknotes."

We should remember that Mr Tsipras was not only elected on an anti-austerity agenda, but also a pro-Europe one. The vast majority of Greeks still wish to remain in the Eurozone. He's got some compromises to make whatever happens. And as for the rest of Europe ? Hardliners argue that to let Greece off the hook would be seriously undermine the credibility of the Euro, and they'd be right ,too. But the counter-argument, and it's largely a political one, would have it that to let Greece slip out of the EU's closest ties towards an aggressive Russian orbit would be a disaster of even greater scale to the whole European "project". No EU leader, least of all Angela Merkel, wants that on their watch, not after 60 years.

The stakes are incredibly high here, and politics rather than economics may yet mean that a fudge of epic proportions is still on the cards.