Greece at the mercy of ECB while sailing through uncharted waters

Eurogroup meeting of 20/02/2015. Mario Draghi, President of the European Central Bank (ECB), and Pierre Moscovici Member of the EC in charge of Economic and Financial Affairs (in the foreground, from left to right), participated in that crucial meeting with the 19 Eurozone Ministers for Finance. They all agreed to consider extending financial assistance to Greece, which was formally known as the Master Financial Assistance Facility Agreement, granted by the European Financial Stability Facility (EFSF). Discussions took place in the context of the expiry of the financial assistance to Greece due on 28/02/2015. (EC Audiovisual Services).

In the efforts to solve the latest Greek enigma, the European Central Bank has once more proved that when it comes to what matters more in the EU, the Eurozone, it constitutes the power house of the entire European edifice. The ECB emerges imbued by truly pan-European motives in serving the Union project. When the Greeks impertinently threaten to apply the Eurozone rules ‘a la carte’ according to their needs, the ECB showed them the exit by instantly disqualifying their bonds from being accepted as collateral for liquidity financing. Then again when the duo Tsipras – Varoufakis decided to comply with the rules the central bank left it to be understood that Greece won’t be let down. Let’s follow the facts.

A quarter after 11 o’clock last Monday night, Athens finally accepted in a mail almost all the Brussels terms, just asking for flexibility and informed accordingly the Eurogroup and the three institutions (European Commission, European Central Bank and International Monetary Fund) which finance and audit Greece. Only a few hours later very early on Tuesday morning Mario Draghi the President of ECB, as if keeping vigil waiting for the Greeks, informed the President of Eurogroup Jeroen Dijsselbloem, that the Athens proposal “is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review”.

The rest was easy

Based on this assessment and on similar appraisals by the EU Commission and the IMF, the Eurogroup (the 19 ministers for Finance of the euro area) conceded to Greece through a brief teleconference on Tuesday afternoon a four-month extension of its current program, thus keeping the country in the Eurozone and saving the financial universe from a new Armageddon. In that mail to the three institutions late on Monday night the Greek minister of Finance Yianis Varoufakis accepted that his country will comply with the euro area rules. Nevertheless the reform measures presented by Athens in that communiqué are rather vague.

Varoufakis states clearly that Greece will repay promptly all her creditors and will accomplish the terms of the second Memorandum of Understanding, agreed in 2012 between the country and the three institutions. Still a lot of things in the Greek proposals remain uncertain, because the seven page letter of Varoufakis didn’t cover all the details on ways and means. In reality the 2012 MoU covers almost all the economic and other policies of Greece and extends to thousands of pages.

Draghi understands

Mario Draghi observed that in his letter to Dijsselbloem. The President of ECB noted: “However, as we expected it was not possible for the (Greek) authorities to elaborate on concrete proposals and commitments that can be assessed by the institutions in respect to growth, public finances and financial stability. Given the very limited time available, this is understandable”. As a result the ECB accepted that the Athens letter “to be a valid starting point for a successful conclusion of the review”. The conclusion of this ‘review’ will signal that Greece has fulfilled all its obligations contained in the MoU. Unfortunately there is a lot of uncharted terrain to be crossed in order to arrive there. Let’s try to get through.

The vagueness goes both ways though. Equally unclear is the decision of the Eurogroup in accepting the Greek proposal of last Monday. The Press release issued by Dijsselbloem states that the Eurogroup accepts the Greek proposal “to be a valid starting point for a successful conclusion of the review” and adds “We (the ministers of Finance) call on the Greek authorities to further develop and broaden the list of reform measures…in order to allow for a speedy and successful conclusion of the review”. Nothing new about the issue which haunts Athens most; money. Understandably the Greek government will start receiving again soft loans the earliest this June.

What about banks’ liquidity?

This subject is covered by the Friday 20 February Eurogroup statement where for the first time, “The Eurogroup… and the new Greek authorities reached common ground”. It is pretty clear in that text that there will be no more money from the Eurogroup unless Greece fully accomplishes the ‘review’. And this is impossible to be achieved before the summer. What will happen then in the coming month or months? Predictably, during the next weeks the Tsipras – Varoufakis duo will be agonizing to fulfill the terms of the above Brussels arrangement and at the same time confront the growing internal dissension within the governing SYRIZA party condemning their latest choices. And all that without a clear economic backing from Eurozone.

On top of that there are maturing liabilities that Greece will find it extremely difficult if not impossible to serve by itself. Greece has to honor IMF loans and interests maturing in March of the order of €2.5 billion. In February the Greek exchequer paid €1.6bn for similar purposes. Without external help Greece, government and the banking system together, may go down within the next few weeks even after being saved for a third time by Eurozone. Then what?

The Frankfurt cavalry is not German

Once more the Frankfurt based ECB came along to answer this deadlock too. A careful reader will find the solution in Draghi’s letter to Dijsselbloem. The central banker speaks clearly about a successful conclusion of the ‘review’. Nonetheless this means that Greece is on a ‘program’ overseen by the three institutions. Consequently the country’s bonds can be accepted by the ECB as collateral to refinance the liquidity of the Greek banks or at least the ECB can authorize the Bank of Greece to unleash more liquidity for the country’s four systemic lenders.

On their turn the banks can lend money to the government, by buying more treasury bills of short maturities. This wouldn’t be arranged in a lump sum way covering the needs of the next four months, but in a step by step process according to the progress in the negotiations between Greece and the three institutions. Draghi confirmed that yesterday speaking at the European Parliament. He said that the Greek bonds will be again accepted as collateral for bank refinancing when the Greek government accepts the terms and the conditions of the MoU. This prerequisite may soon materialize, albeit gradually.

Tsipras’ problems

In this way the Tsipras government can steer clear the financial minefield of the next 120 days, until a new long-term economic agreement is struck by June between Athens and Brussels. As a result all along the next four months Greece will stay afloat through decisions taken by the ECB. Of course this is the carrot, as for the stick it remains to be seen.

Obviously this leverage will be used by the three institutions to discipline Greece in order to concede to a new long arrangement compatible with the Eurozone rules. Of course Tsipras and Varoufakis will have a difficult time in passing through the Greek Parliament all the related unpopular measures in order to comply with the demands of the country’s creditors. Undoubtedly, this process may present insurmountable political and economic problems for the new Greek authorities.

Everything goes

The aforementioned difficulties in finalizing and applying the current arrangement between Athens and Brussels are just the upper part of the iceberg. What is to follow until this summer will be much more thorny and complex, given the resistance if not the hostility that Tsipras and Varoufakis are facing within and without SYRIZA. An astonishing number of 40 government deputies openly and strongly disagreed yesterday with the choices of the leadership.