Wednesday, 1 July 2015

Tsipras capitulates

Greek prime minister Alexis Tsipras has capitulated to creditors’ demands, 72 hours after walking out of talks with them and declaring a referendum.

Tsipras sent a letter to the country’s three institutional creditors, the European Commission, the European Central Bank and the International Monetary Fund, asking them to extend its financial assistance programme by two years.

In return, he accepted almost all the measures in their plan, requesting only a continued discount of consumer tax (VAT) on Greek islands, and a delay of a few months on the implementation of pension cuts and labour reform.

The letter, first made public by the Financial Times, was confirmed at lunchtime on Wednesday by the prime minister’s office.

The letter says: “The Hellenic Republic is prepared to accept this Staff Level Agreement… as part of an extension of the expiring EFSF programme and the new ESM Loan Agreement, for which a request was submitted today, June 30th 2015.”

The EFSF programme is Greece’s first loan arrangement, in which the bulk of 100bn euros was disbursed by the newly created European Financial Stability Mechanism. Greece wants the European Stability Mechanism to repay its debt for a two-year period of – essentially - bankruptcy protection.

The ESM is an intergovernmental distress fund that succeeded the EFSF and operates under the authority of the European Commission.

Tsipras stresses the date, because he sent the letter just within the period of the now expired financial assistance programme.

The DSK factor

In asking for a two-year moratorium, Tsipras is picking up an idea expressed by former IMF director Dominique Strauss-Kahn on Sunday.

Strauss-Kahn suggested that instead of giving the Greeks more loans they will have difficulty repaying, they be given a two-year reprieve from debt payment to put the economy back into growth.

Following that, he said, they should have a significant amount of debt forgiven and a lengthened schedule of payments for the remainder, so as to lighten the annual load and render the debt sustainable.

"My proposal is the following: Greece should get no more new financing from the EU or the IMF but it should get a generous maturity extension and significant nominal debt reduction from the official sector," he said.  

"Having no access to markets and receiving no new financing from the EU or the IMF it will have to balance its budget alone," Strauss-Kahn said, warning that the Greeks would "need to make tough fiscal choices but they would make them on their own".

Greek political parties universally agree with the idea of a partial debt forgiveness and maturity extension. The ruling Syriza leftists have also endorsed the moratorium idea.

In uncharted water

However, Tsipras is unlikely to be allowed back into the good graces of the Eurozone.

Addressing the Bundestag on Wednesday, German Chancellor Angela Merkel, said she would wait for the result of the referendum on July 5 before resuming the initiative on any financing deal with the Greeks.

The tough stance reflects anger across the Eurozone over the manner in which Tsipras and his team departed ongoing talks at the singe currency union’s forum of finance ministers, the Eurogroup, on Saturday. Since then, there has been a war of words that has soured Greece’s relations with the rest of Europe.

Tsipras’ government now seems unlikely to last very long. Its tactics of brinkmanship and its uncouth language and demeanour have brought Greece’s relations with Europe to an all-time low. Those tactics have also now made Greece the first developed economy to fall into arrears with the International Monetary Fund; it is set to default on payments to the European Central Bank this summer as well.

At home, Tsipras’ refusal to strike a deal over the weekend has caused a bank run and persuaded hardliners in the ECB to stop supplying Greek banks with liquidity. This has triggered a closure of banks and capital controls in Greece, meaning the Greek economy is beginning to see shortages and signs of a slowdown. If extended, these cannot but deepen the recession Greece has posted in the first quarter.


Now, Tsipras has lost both the stability of a deal with Europe, and the romantic glory of a socialist charge against the odds of capitalism. Even if he maintains the popular mandate, his party could begin to disintegrate from within, as moderates and diehard leftists decide they can no longer cohabit. And this may be the fall his creditors wish to provoke by insisting on his carrying out the referendum. A no vote means he has to manage alone; a yes vote amounts to a public censure of his policies.  


But who would then assume management of the economy and the negotiations with creditors that are so crucial to it? Would they make the right choices, scaling back the crushing burden of the public sector on the private economy, and cutting early retirement for over-entitled payrolls? And after such a Waterloo, does any Greek government have the leverage or diplomacy to disabuse creditors of their most punishing and recessionary views, and convince them to reschedule Greece’s debt?

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