AGreekment

Varoufakis’ Still-Born Plan

As we have pointed out on Friday, Mr. Tsipras’ negotiating position has not at all “improved” as a result of the referendum. Some have however argued that if a plan hatched by former finance minister Mr. Varoufakis had been implemented (which you can read about on Zerohedge), things might have gone differently. This is possible, but frankly, not very likely. The salient points of the maverick finance minister’s plan were the following:

Yannis Varoufakis during a meeting of the Syriza parliamentary group in Athens – at least he gets to write a book about his five months as finance minister now.

Photo credit: Foto: Alexandros Vlachos / DPA

As Schäuble supposedly said, elections cannot be allowed to change anything. But Varoufakis believes that they could have changed everything. On the night of the referendum he had a plan, Tsipras just never quite agreed to it.

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He said he spent the past month warning the Greek cabinet that the ECB would close Greece’s banks to force a deal. When they did, he was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.

None of the moves would constitute a Grexit but they would have threatened it. Varoufakis was confident that Greece could not be expelled by the Eurogroup; there is no legal provision for such a move. But only by making Grexit possible could Greece win a better deal. And Varoufakis thought the referendum offered Syriza the mandate they needed to strike with such bold moves – or at least to announce them.

He hinted at this plan on the eve of the referendum, and reports later suggested this was what cost him his job.

Varoufakis was outvoted, which perhaps shouldn’t be too big a surprise. Greece simply doesn’t have the administrative resources and expertise to handle an exit from the euro zone smoothly (the euro zone really is a roach motel), and Varoufakis’ plan hinged on a gamble: namely that these steps wouldn’t have led to the dreaded “Grexit”. He may actually have had a point regarding the legal situation: There are no provisions by which a country can be forced out of the euro zone.

Let us be realistic though. If the ECB were to cut off ELA funding completely, the Greek banking system’s insolvency would immediately become manifest. The government would be forced to adopt a new currency sooner or later, unless it was prepared to introduce even more severe austerity measures than those demanded by the EU.

This leaves only the question of whether the euro-group would have been sufficiently impressed by the “Grexit” threat to actually give in to Syriza. We would argue that the answer to this question is actually no. Yes, the EU’s movers and shakers have always had an enormous incentive to keep the “extend and pretend” game with Greece going, namely the contingent liabilities stemming from EFSF funding guarantees and TARGET-2 balances, as well as direct liabilities from bilateral loans to Greece.

There have reportedly also been significant differences within the euro-group as to how important it was to keep Greece in the euro zone. The governments of countries whose pensioners are getting half of what Greek pensioners are getting (such as Estonia or Slovenia) are understandably loath to support a country that seems uniquely unprepared to actually implement reforms. They sacrificed a great deal to get their own economies back into working order, and they cannot understand why an exception should be made for Greece.

Others like the governments of France and Italy, countries that themselves have been extremely reluctant to adopt economic reform, by contrast wanted to cut the Greek government some slack. Mr. Hollande e.g. let it be known that he thought that losing Greece as a member of the EZ would be a fatal mistake and lobbied heavily for creditor concessions.

All that said, it was clear that the political leadership of the most important euro area economy, Germany, was no longer prepared to keep Greece funded at any price. Simply put, this has become politically impossible, a fact Mr. Tsipras seems to be well aware of and Mr. Varoufakis seems to have underestimated.

In short, had Varoufakis’ plan been accepted by the Greek cabinet, the euro-group with “bad cop” Mr. Schaeuble in the lead would very likely have said: Be my guest. Goodbye, and thanks for all the fish. Instead of continuing negotiations, the EU would have been busy drafting a humanitarian aid plan for Greece over the weekend.

How cartoonists see the agreement – however, we believe this interpretation is only correct if one likes Greece-style statism (see below).

Cartoon by: BOB

Is Greece Being “Humiliated”? A Look at the Creditors’ Demands

Allegedly, the deal offered by the creditors to Greece over the weekend was “humiliating”. A much frequented Twitter hashtag by the name #ThisIsACoup has sprung up overnight, where countless people are falling over each other sotto voce denouncing the deal to which Alexis Tsipras has now in principle agreed.

We would submit that Greece’s private depositors and savers, who still have an estimated €115-120 billion in deposits in the Greek banking system (below you can see the data until the end of May), plus an unknown amount of cash in suddenly inaccessible safe deposit boxes with Greek banks, are by contrast breathing a sigh of relief and probably couldn’t care less about the humiliation.

Funny enough, all those denouncing Tsipras’ acceptance of the deal never seem to be giving much thought to these people. Admittedly, they were stupid to leave any of their money with the banks – but that doesn’t change the fact that a “Grexit” would impose large pecuniary losses on them. We have a hunch that the many armchair strategists out there wouldn’t be prepared to make them whole. Just saying.