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Troika Tightens the Noose on Greece as Government Cash Crunch Worsens

Monday, March 16, 2015 By Yves Smith, Naked Capitalism | News Analysis
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"I begin to discern the profile of my death." That arresting sentence, culled from early drafts, served as the anchor for one of the finest novels ever written, Margarite Yourcenar's Memoirs of Hadrian.

The Troika and Eurogroup look to be working towards the Greek government to start having similar thoughts. However, given the high level of popular support for Syriza, and press reports that Greek citizens fully expect that the new government to at best only be able to deliver on a small portion of its campaign promises, the end game for Greece is looking more and more likely to be a failed state rather than a more neoliberal-friendly government.

We warned almost as soon as the memorandum was agreed among Greece, the Troika, and the Eurogroup, that given that the government was already out of cash and had IMF payments due in March, the logical course of action would be to withhold funds to force Greece to give in on structural reforms. Remember that the current "bailout," which is being used as a term of art, is seen by the Troika and Eurogroup as a continuation of the existing IMF funding package, which includes a set of structural reforms. Syriza wanted to change what it says are 30% of them. The IMF and ECB have made clear that they expect the new government to stick with the existing program, and their body language is that they aren't open to much in the way of changes, save perhaps humanitarian relief (Varoufakis has said that he secured agreement on that issue; the Troika has been mum).

Indeed, the creditors are behaving just as expected. From Friday's ekathimerini:

Greece submitted to Eurogroup chief Jeroen Dijsselbloem Friday an outline of seven reform proposals to form the basis for discussion at Monday's meeting of eurozone finance ministers, but the signs from Brussels are that Athens is no closer to securing the release of its next tranche of bailout funding.

The 11-page document sent by Finance Minister Yanis Varoufakis sets out several proposals that have already been made public as well as some that were only made known Friday. The suggestion that caused the most surprise was to fight tax evasion by enlisting non-professional inspectors, including tourists, on a two-month basis during which they would collect audiovisual data that could be used to target evaders..

In his letter to Dijsselbloem, Varoufakis calls for technical discussions regarding the proposals to begin as soon as possible.

"We envisage that… the majority of the items on our first list can be further specified as soon as possible so that the resulting agreement can be ratified by the Eurogroup, and Greece's Parliament, and become the basis for the review," wrote the Greek finance minister, who added that the government proposes all technical discussions and fact-finding or fact-exchange sessions should take place in Brussels.

A European official speaking on condition of anonymity told journalists in the Belgian capital that since no technical work had been done by Greece's lenders due to the proposals only being submitted Friday, there is no way eurozone finance ministers will be in a position to approve the Greek proposals on Monday.

You can see what is going on here. Notice first that the proposed reform list has changed, allowing the Troika to act as if this is a new proposal. Second, the two sides disagree on what constitutes an adequate technical review, and the Troika's view will govern. Third, which the article does not acknowledge, Varoufakis appears to be trying to circumvent the process envisaged in the memorandum, which was for the Troika to approve the reform package, and then have the Eurogroup approve any release of funds.

So the lenders' actions can be dressed up as bureaucratic necessities, but they amount to delaying tactics given that time is clearly of the essence for Greece.

The Greek government is starting to sound desperate. Per the Telegraph:

Speaking in an interview with Der Spiegel magazine, Alexis Tsipras appealed to the ECB to alleviate pressure on the cash-strapped country.

The ECB "is still holding the rope which we have around our necks" said Mr Tsipras, referring to the central bank's reluctance to resume ordinary lending to Greek banks at a meeting in Cyprus on Thursday.

The central bank has also rebuffed Greek appeals to raise the limit on short-term debt issuance, as it faces €6.5bn in payments over the next three weeks.

Should the ECB continue to resist Greek pleas for assistance, "the thriller we saw before February 20 will return" warned Mr Tsipras, referring to the market turmoil which gripped the country as it carried out protracted negotiations with its creditors.

The wee problem was that the thriller extended only to Greek deposits, Greek bonds, and European stocks. Unlike the its US coutnerpart, the ECB doesn't care about equity prices. Periphery bond yields barely budged, and now with QE about to be launched, they are now trading at insanely low levels. Mario Draghi almost certainly thinks he has the Greek situation well contained.

And the February 20 comparison does not bode well either. As Nantina Vgontzas put it in a Real News Network interview:

You know, in April the institutions–or the troika, it was formally called, you know, the IMF and the ECB, they're going to review SYRIZA's budget, basically. And at that point the European Central Bank might be playing some games again. Already today they said that they're not going to loan money to Greece until they see that they're complying with the bailout measures. So as those pressures are going to increase again, we're going to see if the government is going to blink like they did on February 20 or if they're going to resort to imposing capital controls, nationalizing the banks, and then, lastly, the most radical–not in the ideal ideological sense, but in terms of its economic repercussions, exiting the Eurozone.

John Dizard of the Financial Times works through the implications:

The problem is that the Greek government will run out of cash to pay its operating expenses in full by the summer, or even sooner, and neither the Europeans nor anyone else will give them enough new money to pay its bills. That means the Syriza cabinet will have to tell public sector employees and pensioners that part of their income will be paid in (transferable) IOUs, which will plunge to a steep discount. The leaders can blame Germans, oligarchs, neoliberal economists or Martians, but a lot of their core supporters will be unhappy, and quite open about their feelings.

The eurogroup political leadership and the eurocracy are prepared for this. Their recent civil exchange of letters represents a truce, not a peace. The eurogroupies know that there is no mutually acceptable deal to be had with the Syriza government. So their silent intention is to negotiate with the next government, whoever that might be, after the Greek government is forced to call for an early election.

Things have to get pretty bad for that to happen; after all, Syriza just won fair and square less than two months ago, and their policies are supported by a majority of the Greek public.

The Troika, having gotten Greece to blink once, appears to believe it will prevail no matter what, either by getting Syriza to capitulate (unlikely but not impossible) or to make non-compliance so costly that the government will be ousted. Of course, as we've separately pointed out, economic sanctions (which is what this amounts to) do not have a great track record of success. Look how Putin enjoys high poll ratings despite the concerted efforts of the West to damage Russia's economy as a way to force regime change.

However, one factor that works against Syriza is not just its utter lack of experience in governing, but also visible divisions in the party itself. Ministers have repeatedly contradicted each other, and the vote within the party representatives was 42% against approving the memorandum, a troubling high level of dissent. So the problem for Syriza is likely to be not the fact that Greece will suffer more if it continues to defy the Troika and Eurogroup, but that the ruling coalition will be perceived as less than competent in reacting to adverse developments and ameliorating the damage.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.

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Troika Tightens the Noose on Greece as Government Cash Crunch Worsens

Monday, March 16, 2015 By Yves Smith, Naked Capitalism | News Analysis
  • font size decrease font size decrease font size increase font size increase font size
  • Print

"I begin to discern the profile of my death." That arresting sentence, culled from early drafts, served as the anchor for one of the finest novels ever written, Margarite Yourcenar's Memoirs of Hadrian.

The Troika and Eurogroup look to be working towards the Greek government to start having similar thoughts. However, given the high level of popular support for Syriza, and press reports that Greek citizens fully expect that the new government to at best only be able to deliver on a small portion of its campaign promises, the end game for Greece is looking more and more likely to be a failed state rather than a more neoliberal-friendly government.

We warned almost as soon as the memorandum was agreed among Greece, the Troika, and the Eurogroup, that given that the government was already out of cash and had IMF payments due in March, the logical course of action would be to withhold funds to force Greece to give in on structural reforms. Remember that the current "bailout," which is being used as a term of art, is seen by the Troika and Eurogroup as a continuation of the existing IMF funding package, which includes a set of structural reforms. Syriza wanted to change what it says are 30% of them. The IMF and ECB have made clear that they expect the new government to stick with the existing program, and their body language is that they aren't open to much in the way of changes, save perhaps humanitarian relief (Varoufakis has said that he secured agreement on that issue; the Troika has been mum).

Indeed, the creditors are behaving just as expected. From Friday's ekathimerini:

Greece submitted to Eurogroup chief Jeroen Dijsselbloem Friday an outline of seven reform proposals to form the basis for discussion at Monday's meeting of eurozone finance ministers, but the signs from Brussels are that Athens is no closer to securing the release of its next tranche of bailout funding.

The 11-page document sent by Finance Minister Yanis Varoufakis sets out several proposals that have already been made public as well as some that were only made known Friday. The suggestion that caused the most surprise was to fight tax evasion by enlisting non-professional inspectors, including tourists, on a two-month basis during which they would collect audiovisual data that could be used to target evaders..

In his letter to Dijsselbloem, Varoufakis calls for technical discussions regarding the proposals to begin as soon as possible.

"We envisage that… the majority of the items on our first list can be further specified as soon as possible so that the resulting agreement can be ratified by the Eurogroup, and Greece's Parliament, and become the basis for the review," wrote the Greek finance minister, who added that the government proposes all technical discussions and fact-finding or fact-exchange sessions should take place in Brussels.

A European official speaking on condition of anonymity told journalists in the Belgian capital that since no technical work had been done by Greece's lenders due to the proposals only being submitted Friday, there is no way eurozone finance ministers will be in a position to approve the Greek proposals on Monday.

You can see what is going on here. Notice first that the proposed reform list has changed, allowing the Troika to act as if this is a new proposal. Second, the two sides disagree on what constitutes an adequate technical review, and the Troika's view will govern. Third, which the article does not acknowledge, Varoufakis appears to be trying to circumvent the process envisaged in the memorandum, which was for the Troika to approve the reform package, and then have the Eurogroup approve any release of funds.

So the lenders' actions can be dressed up as bureaucratic necessities, but they amount to delaying tactics given that time is clearly of the essence for Greece.

The Greek government is starting to sound desperate. Per the Telegraph:

Speaking in an interview with Der Spiegel magazine, Alexis Tsipras appealed to the ECB to alleviate pressure on the cash-strapped country.

The ECB "is still holding the rope which we have around our necks" said Mr Tsipras, referring to the central bank's reluctance to resume ordinary lending to Greek banks at a meeting in Cyprus on Thursday.

The central bank has also rebuffed Greek appeals to raise the limit on short-term debt issuance, as it faces €6.5bn in payments over the next three weeks.

Should the ECB continue to resist Greek pleas for assistance, "the thriller we saw before February 20 will return" warned Mr Tsipras, referring to the market turmoil which gripped the country as it carried out protracted negotiations with its creditors.

The wee problem was that the thriller extended only to Greek deposits, Greek bonds, and European stocks. Unlike the its US coutnerpart, the ECB doesn't care about equity prices. Periphery bond yields barely budged, and now with QE about to be launched, they are now trading at insanely low levels. Mario Draghi almost certainly thinks he has the Greek situation well contained.

And the February 20 comparison does not bode well either. As Nantina Vgontzas put it in a Real News Network interview:

You know, in April the institutions–or the troika, it was formally called, you know, the IMF and the ECB, they're going to review SYRIZA's budget, basically. And at that point the European Central Bank might be playing some games again. Already today they said that they're not going to loan money to Greece until they see that they're complying with the bailout measures. So as those pressures are going to increase again, we're going to see if the government is going to blink like they did on February 20 or if they're going to resort to imposing capital controls, nationalizing the banks, and then, lastly, the most radical–not in the ideal ideological sense, but in terms of its economic repercussions, exiting the Eurozone.

John Dizard of the Financial Times works through the implications:

The problem is that the Greek government will run out of cash to pay its operating expenses in full by the summer, or even sooner, and neither the Europeans nor anyone else will give them enough new money to pay its bills. That means the Syriza cabinet will have to tell public sector employees and pensioners that part of their income will be paid in (transferable) IOUs, which will plunge to a steep discount. The leaders can blame Germans, oligarchs, neoliberal economists or Martians, but a lot of their core supporters will be unhappy, and quite open about their feelings.

The eurogroup political leadership and the eurocracy are prepared for this. Their recent civil exchange of letters represents a truce, not a peace. The eurogroupies know that there is no mutually acceptable deal to be had with the Syriza government. So their silent intention is to negotiate with the next government, whoever that might be, after the Greek government is forced to call for an early election.

Things have to get pretty bad for that to happen; after all, Syriza just won fair and square less than two months ago, and their policies are supported by a majority of the Greek public.

The Troika, having gotten Greece to blink once, appears to believe it will prevail no matter what, either by getting Syriza to capitulate (unlikely but not impossible) or to make non-compliance so costly that the government will be ousted. Of course, as we've separately pointed out, economic sanctions (which is what this amounts to) do not have a great track record of success. Look how Putin enjoys high poll ratings despite the concerted efforts of the West to damage Russia's economy as a way to force regime change.

However, one factor that works against Syriza is not just its utter lack of experience in governing, but also visible divisions in the party itself. Ministers have repeatedly contradicted each other, and the vote within the party representatives was 42% against approving the memorandum, a troubling high level of dissent. So the problem for Syriza is likely to be not the fact that Greece will suffer more if it continues to defy the Troika and Eurogroup, but that the ruling coalition will be perceived as less than competent in reacting to adverse developments and ameliorating the damage.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.