Deep chasm still divides Athens and Brussels; can Eurozone use the nuclear arm of liquidity against Greece?

EU Heads of State and Government met at the European Council of 12 February 2015, in Brussels. From left to right: Francois Hollande, President of France, Angela Merkel, German Federal Chancellor, Alexis Tsipras, Greek Prime Minister. (Shoot location: Brussels – Belgium, Shoot date: 12/02/2015; European Council - Council of the European Union Audiovisual Services).

EU Heads of State and Government met at the European Council of 12 February 2015, in Brussels. From left to right: Francois Hollande, President of France, Angela Merkel, German Federal Chancellor, Alexis Tsipras, Greek Prime Minister. (Shoot location: Brussels – Belgium, Shoot date: 12/02/2015; European Council – Council of the European Union Audiovisual Services).

Today the Eurogroup, the 19 Eurozone ministers of Finance at 3 o’clock in the afternoon will start discussing the future of Greece. It’s quite uncertain if a decision will be reached. Late last Saturday the technical consultations for the Monday meeting were concluded in Brussels. The preliminary work was realized by a group comprising Greek officials, the European Commission, the European Central Bank and experts from the Euro-working Group. Government sources in Athens appear rather reserved if a final result could be reached today. Alexis Tsipras, the Greek Prime Minister from Nicosia, Cyprus, where he flew on Saturday on official visit, commented that ‘it’s very early to talk about a deal”.

Greece is practically under a two month extension of its last Memorandum of Understanding 2012-2014 which expires on 28 February. The Memorandum was signed in the summer of 2012 between the previous conservative+socialist alliance government on the one side and the ‘troika’ of the country’s auditors/creditors, consisting of the European Commission, the ECB and the International Monetary Fund on the other. The present left-wing administration in Athens though, under Alexis Tsipras who won the elections of 25 January, has totally rejected this Memorandum and the ‘troika’ of auditors.

Athens wants a political agreement

He seeks a new arrangement with the creditors but on the political level, rejecting the close scrutiny of the country’s books by auditors/accountants. Tsipras and his left-wing SYRIZA party provoked and won the January election on a populist anti-troika and anti-Memorandum banner. He rejects the severe incomes and fiscal austerity and disagrees with most of the unpopular structural measures in the labour, the products and the services markets. Tsipras also promises to reinstate the government workers who lost their jobs during the past few years, when the previous government tried to cut down a huge public deficit. Understandably the creditors couldn’t swallow all that SYRIZA has promised to realize. Presently the vast majority of the Greek debt is held by the country’s Eurozone peers (with Germany holding a very large part), the European Union, the ECB and the IMF.

As it was expected, Greece’s creditors and the world capital markets were alarmed by the prospect of a stalemate and a possible Greek exit from Eurozone, the Grexit. Theoretically, if a new agreement or another program or whatever they want to call it is not signed before the 28 of February, the country will be out in the cold as from 1st March. Without more soft loans from creditors and ECB liquidity for the banks, the country will soon go bankrupt. For one thing, the new government won’t be able to repay its debts or even foot the bill of the government sector wages and pensions.

First the banks

By the same token, the Greek banks won’t be able to cover half a billion daily deposit withdrawals without the full support of ECB. Bank deposits have shrunk by at least €15 billion during the past weeks, due to uncertainty about everything. Last week, the ECB raised the liquidity coverage ceiling for the Greek banks by €5bn thus supporting them for a few more days. The Governing Council of ECB is to be convened again on 18 February to decide if the central bank can continue supplying liquidity to the country for some more weeks. The ECB says it can support the Greek financial system with liquidity of up to €65bn.

It must be noted that during the 2012 crisis the ECB had supplied the Greek financial system with liquidity reaching €168bn. Now, the low limit €65bn is inexplicably disproportionate with the 2012 much higher limit and the ECB will find it very difficult to explain this disparity. So, despite the threats from Berlin that the ECB can let Greece rot at any moment, this is not necessarily true.

Can the ECB let Greece rot?

Yet some dignitaries in Brussels, Berlin and elsewhere threatened last week to stop conferring with Athens, if Greece didn’t accept a new and longer extension of the current Memorandum of Understanding which goes together with severe austerity and unpopular measures. Sidestepping the threats, Tsipras rejected all that and the Greek representation was ready to leave for Athens. However, very early on Friday morning Jeroen Dijsselbloem, the President of Eurogroup, and minister for Finance of Holland offered to Greeks more technical deliberations during the weekend, in order to prepare the Eurogroup of today. Reportedly behind all this ‘cat and mouse play’ was Germany.

Two different views

Now, reports from Athens say that those deliberations have led to the drafting of two documents. One with what Greece demands (longing for a new agreement in two steps, short and long, and €10bn in bridging finance) and the other with the opposite side’s proposals offering again more austerity and unpopular measures. Politically though, it’s impossible for the Tsipras government to accept that and remain in power.

He cannot accept more deregulation in the labour market or further increase the government budget prime surpluses. In the positive side, Greece promises to effectively and drastically confront tax evasion and avoidance, fight corruption and introduce groundbreaking reforms to revitalise the business environment. The other side insists it cannot offer ‘bridging finance’ and asks for a full new program to be agreed before the end of February.

Tsipras won’t blink first

According to Brussels sources, Germany seeks to bring the Greek government to its knees. Ideally Berlin wants Tsipras to repudiate all his popular pre-electoral promises and beg to sign a continuation of the same recipe Greece applied for past five years. This weekend though the Merkel administration must have understood that this is impossible. The Greeks will appear today again adamant in demanding a new arrangement, but offering at the same time to uphold almost 70% of what good the old Memorandum contains plus an uncompromising effort to combat tax evasion and corruption.

As things stand now, today’s Eurogroup most probably won’t be able to come up with a final arrangement. Nevertheless, given the bleak prospects for both sides, if Greece abandons the euro area, today the 18 ministers of Finance, including Yianis Varoufakis, will set the base for a full new agreement to be reached with the month. As for the threats that the ECB could let the Greek financial market dry up, Ewald Nowotny, Governor of Oesterreichische Nationalbank and member of ECB’s Governing Council, along with others say that this is inconceivable for as long as Greece is a member of Eurozone. The Cyprus experiment cannot be repeated.

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