13 Apr 2015

Greece: why something has to give

I got an email this week predicting that Greece would enter a “rapture” with the ECB as early as 24 April. What my informant meant was “rupture” but the closer we get to the event, the more I think the word rapture actually describes what may be about to happen.

If the far-left government actually ends up in a stalemate with its lenders by the end of April, leading to a default and possible ejection from the eurozone, then the “rapture” as envisaged by Christian fundamentalists – a cataclysmic final day in which half the human race is suddenly swept up into the air – might be a good metaphor.

For one part of the ruling radical left party, Syriza, it would feel like vindication. For another damnation. And for the Greek people, 80 per cent of whom want to stay inside the euro at any cost, it might feel a bit like the end of the world as they know it.

But after three weeks of detailed negotiations, 24 April is beginning to look like a deadline: Nikos Theocharakis, head of fiscal policy at the Greek finance ministry, is reported to have told Eurogroup negotiators that Greece might run out of cash thereafter.

Let’s start by considering the raw numbers. Greece can’t borrow big money on the global markets, because its €320bn debt is – rightly, I think – seen as unpayable. No level of austerity bearable by Greek society could pay down the debt.

So Greece is currently trying to survive by running a small budget surplus: that is, each year the government is trying to save 1.5 per cent of GDP by spending less than it takes in tax.


Problem number one is, having “achieved” this just before the election, the conservative-led government’s numbers proved to be fictional.

Problem number two is, with capital fleeing the country after the ECB pulled Greece’s credit line, economic activity is suppressed and foreign trade collapsing. Tax receipts fell in January-February, and though it looks like they improved in March, this was mainly from one-offs: early settlement deals on tax arrears and a lump sum from the banks.

So week by week the Greek state is having to pay salaries and pensions out of a small pot of surplus cash – and is raiding the cash reserves of various public bodies to keep itself afloat.

Problem number three is, even if it makes a small surplus each month, the Greek state has to roll over around €15bn of debts this year, much of it in the form of short-term IOUs its banks would normally buy – but those banks’ ability to buy short-term debt has been capped by the ECB.

Grounds for agreement

Throughout the whole crisis, time has worked on the side of Greece’s creditors and Syriza’s opponents. When the ECB pulled normal credit lines and capped emergency lending in February, that was bound to accelerate the bank run that had begun during the last month of the old government. That then forced the hand of finance minister Yanis Varoufakis (pictured above) at the 20 February Eurogroup, into a substantial – but not total – climbdown on Syriza’s anti-austerity programme.

Since then Varoufakis’s aim has been to prove that there is a left-wing, anti-austerity version of structural reform acceptable to creditors, allowing them to release about €7bn of loans they’re withholding. Even then it would only be a prelude to discussions about how to reschedule the €320bn debts Greece owes.

The latest attempt, in the form of a 26-page document in English, was seen as providing a credible grounds for such an agreement – but the issue is no longer about fiscal credibility.

The pro-euro majority in Syriza has consistently miscalculated the opposition it will face inside the eurozone: it has the USA onside, France and Italy making sympathetic noises, but they are outweighed by a coalition of pro-austerity countries around Germany, which continually blocks any attempt by the European Commission to broker a compromise.

So each time it looks like there is a politically brokered settlement, Germany and a group of it historic allies going back to world war two block progress, either in the ECB or Eurogroup.

‘Dead end’

The depth of Syriza’s attachment to the euro was demonstrated when its economics guru Euclid Tsakalotos addressed MPs at Westminster last month. Faced with encouragement to leave the euro from left-wing Labour MPs, Tsakalotos pointed out the experience of the British and French left in the 1980s with what he called the “dead end” of national economic solutions.

So Syriza’s leadership is wedded to the eurozone but the eurozone is currently configured to smash Syriza.

With growth slowing, and regular tax receipts being bolstered by irregular one-offs, this can’t go on forever.

Big business in Greece is by no means as hostile to Syriza as you might think. Many mainstream businesspeople see the party’s “clean hands” as the only ones that can strangle nepotism and corruption that has ruined the Greek economy over decades. Added to that there is a wing of the Greek conservatives around the Karamanlis dynasty that is, I was told by one former MP aligned to them, “prepared to help” Syriza.

If you add in the small centre-left Potami party, and the new party formed by former PM George Papandreou, there is the clear basis for a “centre-left government” led by Syriza acting as a government of national unity around a programme essentially dictated by Berlin, but with some flexibility to assuage Syriza’s members and voters.

That, effectively, is the emerging strategy of the centre left and globally oriented business community in Greece – and their desire for it has sharpened as Syriza has been pushed towards economic collaboration  with Russia, Iran, Azerbaijan and China.

Forcing a split

But Syriza’s left is strong. The Left Platform, led by energy minister Lafazanis, is strongly anti-euro and feels vindicated by events. This is basically the remnants of Moscow-oriented communism and the far left inside Syriza – but it was joined in the last internal vote with more modernist and “horizontal” leftists, to deliver a 41 per cent vote against the deal done by Varoufakis in February.

So there is pressure growing, from within and without, to force a split in Syriza, with the Left Platform leaving the parliamentary group, and Tsipras now forced to rely on centre-left and Karamanlis-wing conservative votes to get any deal through the Hellenic parliament.

But there is a third force that the leader writers of financial newspapers tend to forget, as they watch Greece pinioned between Berlin and Moscow: the Greek people themselves.

Up to now they have been very quiet. The so-called “social movements” – the unions, anti-fascist groups, food banks, local assemblies and the like – were, as one veteran activist told me, “exhausted” by the time Syriza came to power. Thereafter they were mesmerised by the sudden appearance of a new kind of politics in the parliament: the promise of 100+ corruption cases, a committee to judge the legality of the 2011 bailout, the sudden disappearance of tear gas from the armoury of the riot police, the slow release of migrants from the army camps many were detained in.

Increasing frustration

Those I’ve spoken to this month speak of the increasing frustration of Syriza’s activists and supporters with the hidden drama being played out in Brussels. Meanwhile, in the various ministries Syriza’s leaders are still struggling to assert control and even get accurate information. The president of the parliament, left-wing lawyer Zoe Konstantopoulou, threw its door open to anti-racist activists during a recent demo. But the choreography outside the prime minister’s residence is of feverish crisis management.

Even if you’re on the inside, getting a text message every 10 minutes from somebody who knows what’s happening, the atmosphere of crisis can be exhausting. For those in the streets and cafes, watching it all happen beyond their control, it is becoming exhausting.

At such historic moments, sometimes it comes down to individuals. Varoufakis – US-oriented and western trained, and not even a member of Syriza – will, as his aide told me in February, be the “last one to leave the euro”: so if the moment comes when he has to switch from conciliation to survival, you can be sure all avenues were exhausted. But as he told me just before the election, he believes an unreformed euro will collapse within two years.

Publicly Varoufakis has adopted a tone not just of conciliation but of reconstruction with the eurozone. Privately, however, his advisers – and these are the some of the most centrist people in and around Syriza – are shocked by the level of hostility they met inside the eurozone.

That wing of Syriza that is basically left-social democratic was existentially attached to the euro. Now that existential belief in the euro is being shaken. And the danger for the eurozone is, such a process can be replicated among an entire people if the evidence is marshalled convincingly.

If pushed over the edge – either by the failure of a short-term debt auction or the simple shortfall of receipts – Varoufakis will have no trouble triggering capital controls, emergency taxation of big business and the inauguration of a second currency.

Economy in chaos

At this point it would be up to the eurozone to react. But if it upped the ante, there are powerful weapons in Greece’s armoury: the 80bn it owes the eurozone through the Target 2 system which, as Ambrose Evans Pritchard points out, is unprotected. Then the debts it owes the ECB.

Greece would attempt, at first, to default without leaving the eurozone. But the default would throw European politics and the economy into chaos. The already deflating, semi-stagnant eurozone would face another 12-18 months on the pause button until the banking system absorbed a Greek default.

So in the next two weeks there is an increased danger of “Graccident” – a partial default caused not by Syriza’s strategy but by the ECB miscalculating the meagre supply of financial oxygen it is allowing into the Greek banks, or by a week’s bad receipts at the finance ministry.

Greeks this weekend flocked to their churches to celebrate the Orthodox Easter. Alexis Tsipras, still riding a 71 per cent popularity rating, used the occasion to speak of rebirth and renewal. But among some, the response to the greeting “Christ is risen” was the joking “Send him to Brussels to negotiate!”

But with the Easter pause over, negotiations are approaching a critical stage.

If Greece is forced into an accidental default, damage to the euro project and to the EU’s image would be massive. A central bank seen to be colluding in the bankruptcy of banks it is supposed to supervise, and willing the breakup of a currency union it is supposed to be running, would tarnish the ECB’s reputation for a decade.

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