A Monday to watch the final act of a Greek tragedy; will there be catharsis or more fear?

European Council of March 2015. Informal meeting on Greece in the margin of the European Council. From left to right: Angela Merkel, German Federal Chancellor, Jean-Claude Junker, President of the European Commission, Alexis Tsipras, Greek Prime Minister, Donald Tusk, President of the European Council, Uwe Corsepius, Secretary-General of the Council, Mario Draghi, President of the European Central Bank, Francois Hollande, President of France. (European Council – Council of the European Union, Shoot location: Brussels – Belgium, Shoot date: 20/03/2015).

Today’s Eurogroup summit of the 19 euro area heads of state and government is convened by Donald Tusk, the President of European Council in order to bluntly present Alexis Tsipras, the Greek PM with a final ultimatum; ‘comply or leave the Eurozone’. Of course this initiative was not Tusk’s, given that his mandate is rather administrative than decisive. Only the strong wording probably belongs to him, just expressing his bias against the ‘burdensome Greeks’. Not to forget that Tusk’s appointment as Council President was based on his Polish kind of conservatism plus a compromise between Germany and Britain, with both countries having a strong influence and presence in Poland.

In any case, today’s meeting of the 19 Eurozone leaders was not a decision taken by Tusk but rather by Germany. All along the past five years the laborious EU negotiations with Greece were steered mainly by Berlin, with the other euro area countries having recognized the prerogative of Germany in the endless negotiations with Athens. It was not a surprise then that the German Chancellor Angela Merkel was the first to comment on the announcement about Monday’s euro area summit. The German leader though had a lot to say despite delivering a very brief statement. Let’s elaborate on her dual message.

Merkel writes the end of the story

Only minutes after Tusk released his severe and monotonous 93 seconds video, warning and chastising the Greeks, the German leader took the floor and said that the summit will be able to decide on anything, “only if a basis for decisions is presented”. Obviously this is a direct Germanic way to tell Tsipras that it’s time to give-in to Europe’s demands, by presenting a new proposal containing more government budget cuts and increased public surpluses.

The German leader had more to add. She concluded that if a base for decision is not presented – and everybody understands that such a new platform has to contain more and extra painful Greek austerity measures – the gathering will become just a “Summit of Consultations and the wait will be prolonged”. The question is for how long can Germany wait for Greece to decide about its future? No wonder Tsipras and his government in Athens are engaged in a marathon of fervent discussions and official meetings in order to prepare a new proposal.

Fever in Athens

A number of Athens sources agree that the Greek government is actually preparing a new proposition adding extra taxation and more expenditure cuts, in order to cover the gap separating Greece from its creditors. The remaining differences are estimated to amount to around one euro billion in extra yearly fiscal surpluses. The new Greek proposal is to be presented today to the euro area ministers of finance (the Eurogroup), which is to be convened ahead of the 19 leaders’ summit. Understandably, the crucial part will played there and the leaders will just confirm what the ministers have decided.

The Tsipras government is reported to be preparing a new package of measures containing:
* three VAT categories (6.5%, 13% and 23%), with only pharmaceuticals and books in the small category, a large part of food products in the elevated one and electricity and restauration still under negotiation
* abolishment of early retirements as from 1/1/2016, while the creditors insist the measure to have immediate effect
*further liberalization of product markets and opening of the closed professions
* increased taxation of the corporate sector of the economy and more cuts in defense spending

However, it’s very important to underline that Tsipras has to face a very strong internal anti-austerity opposition in his governing left-wing SYRIZA party. A good part of the party nomenclature and a few government members reject the measures (increased taxation and spending cuts) which are reminiscent to the austerity packages the previous administrations had enforced. Even the right-wing nationalist ANEL party, the minor government alliance segment, has threatened to reject such measures in Parliament. SYRIZA has a parliamentary group of 149 deputies and the ANEL party has 14 seats in a house of 300. Nevertheless, if Tsipras gets a refreshed promise from his euro area colleagues about a debt rearrangement, he could try to introduce the whole package in the legislative and demand his deputies to vote for it.

The financial deadlock

The thorny internal political environment for the Tsipras government is further aggravated by the critical financial position of the country. Both the government and the banking sector are starved of liquidity. Two consecutive administrations have been servicing the maturing debts by using the country’s reserves for eleven months now (around €14.5 billion), leaving the state coffers completely empty. Greece’s central authorities have already touched the reserves of the pension funds and have absorbed liquidity from local government entities. Athens has postponed for the end of June three IMF loan and interest rate payments which are maturing during the month. It’s quite difficult if not impossible for Greece to honor this obligation without help from its creditors.

The situation is equally frustrating in the financial sector of the economy. The country’s banks are kept alive by weekly liquidity transfers from euro the area’s central bank, the ECB. All along the past months the Greeks keep withdrawing their deposits from the banks, with the phenomenon having assumed threatening dimensions this past week. The transfers are regularly decided in Frankfurt, where the ECB is established, on a weekly basis and are realized every Wednesday. Last Friday though the Bank of Greece, the central bank of the country, asked for extra liquidity due to increased withdrawals from the banks.

The answer of ECB to Friday’s request is of particular importance. Before going there it must be noted that, in the face of it, the ECB is a non-political institution and acts strictly according to its statutes. Its President Mario Draghi has said that the central bank will continue keeping alive the Greek financial system for as long as there is a political negotiation between the country and its creditors. Until now this meant that the ECB had to transfer enough liquidity to Greece for at least one week, that is for the time interval between the weekly Wednesday meetings of the relevant monetary committee.

Starved of liquidity

Reportedly, the ECB informed last Friday its constituent Bank of Greece that the liquidity transfers from now on will be realized not on a weekly but on a daily basis. There are rumors that the ECB informed the Greek bankers that as of now their liquidity will be constantly monitored and also that the gaps will be covered ex-post not ex-ante. This means that the ECB abolishes the so far followed practice to support a liquidity cushion of €3bn and instead there won’t be such a facility.

Putting all that together it becomes pretty clear that the end of the Greek tragedy is approaching fast. The question remains for how long more can Germany wait? In any case the fact remains that Merkel spoke of a ‘wait’, and this means Berlin has said its last word over possible concessions. Ostensibly, the German offer has reached its final form. Add to that the daily liquidity monitoring and coverage of the Greek banking system by the ECB and the situation becomes suffocating for Mr Tsipras.

In any case, the two meetings of today (Eurogroup and Summit) will offer more clues about how long the final act of the Greek drama is to last.