Long term debt deal could break Greek logjam
It’s just over a week until Greece hits the hard deadline of fact: it cannot pay the €300m it owes the IMF on 5 June, and must do a deal before then, or signal a default that would immediately draw down the wrath of the ECB onto its stricken banks.
I understand negotiators in Brussels are working to three subheadings: things the Greeks are prepared to give to the lenders, things they’re not, and things they want the lenders to concede to them.
Foremost among what the Greek side wants is a single set of conditions applying to the long-delayed interim agreement, which releases 7.2bn euros of money from the old bailout and applies to the third bailout programme needed when the old one runs out on 30 June.
It is this – the removal of uncertainty for future lenders and investors – which is both closest to the heart of Greek PM Alexis Tsipras, and gives him the best chance of persuading a rebellious party to accept the tough conditions of the coming deal.
I understand the two parties are working towards a staff-level agreement by this weekend, which will essentially cover what Greece gives and what it doesn’t. It is, I understand, though not a done deal, now down to the level of deregulating bakeries and pharmacies.
A staff agreement would leave the politicians at a higher level to make a deal on how much money Greece gets, and in what form three sides of the old Troika restructure the debts in order to accommodate the softening of austerity implied in the low initial primary surplus targets being discussed.
On this, I understand one option being discussed is the centralisation of Greece’s future debt obligations in the European Stability Mechanism, relieving possibly the IMF, and more probably the ECB, of the debt exposure to Greece. This is in order to do a deal on debt sustainability that the IMF can sign off, and to remove the perceived conflict of interest between the ECB as lender and the ECB as prime mover killing or curing the banks of the state it has lent to.
The scale of concessions made by the Greek side so far meant that the Syriza central committee this weekend endorsed the negotiating strategy only by 95 votes to 75.
With opposition growing inside the party, including among left wing modernisers usually loyal to Tsipras, it looks less possible for the scenario desired by centrist politicians in Europe – a split in Syriza and a coalition government of its “moderate” wing with the centrist Potami party – to happen.
On my calculations there would not be enough of Syriza’s parliamentary party left to rule, if the central committee vote were to be translated into the formal and informal networks within the parliamentary group.
The period between the announcement of any deal and its ratification, would be yet another moment of stress for the banking system.
Nevertheless, it is clear why Tsipras might believe it’s worth the gamble.
With a low primary surplus target, and a clear rescheduling or restructuring of the debt, Tsipras could present the deal as strategic settlement: cementing his party in power to pursue the long-term anti-poverty, democratisation and anti-corruption policies that its younger supporters see as important.
The wild card in the whole situation is no longer German finance minister Wolfgang Schauble. It is the ECB. At the traumatic 20 February Eurogroup in Brussels it was clearly signalled that, if the lenders gave a verbal acknowledgement of progress towards a deal, the ECB should restore its normal lending facilities, and raise the cap on the amount of money Greece is allowed to borrow short term, form its banks.
Though progress has been verbally signalled, the ECB has refused to soften; and while Greek negotiators are now on tough-talking terms with their counterparts in Brussels, and in the EU structures, the Greek representation on the ECB remains only the Bank of Greece. And the Greek central bank’s officials issued anonymous briefings last week, transparently designed to sap confidence in the banking system rather than build it.
If, at last week’s Riga summit, there was “understanding in the room” between Merkel, Hollande and Tsipras, nobody can be certain that the ECB itself is on board until it acts.
And so far has the ECB veered from predictability, since its board fractured into a pro-German minority and a dovish majority, nobody knows what it will do.
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