EU And Greece Still At Loggerheads

The Song and Dance Resumes

In recent days it has become increasingly clear that the political theater between the EU and the new government Greece is set to continue. For a while, markets were convinced that what is widely considered the worst case scenario (a Greek default and exit from the euro) had been avoided, but it appears it hasn’t been avoided just yet. Various EU politicians have expressed concern over the public statements of Greek politicians in recent weeks, as they are making it tougher for them to sell the agreement to their own parliaments and citizens, but these statements may be mainly designed for the Greek government’s domestic audience anyway.

Photo credit: btwcapture

According to recent press reports, the EU is not happy with the reform proposals submitted by Greece. Ideas such as to use tourists as undercover tax collectors didn’t really detract from the proposal’s lack of substance (from the point of view of Greece’s creditors). The Greek government does of course have a very valid point when it calls the adoption of the extend-and-pretend bailout that only ended up increasing Greece’s public debt even more a major mistake. It is also true that the bailout decision was very much designed with the protection of French and German banks in mind, which lobbied quite hard in its favor (one can sense their absence this time around – as they have shed much of their exposure to Greece).

However, a default would have instantly bankrupted the Greek banking system as well. Greece’s banks are the Achilles heel that likely caused previous Greek governments to grudgingly accept the harsh bailout conditions prior to the last election. We suspect that this has also been a major factor in Syriza’s toning down of its rhetoric after the election. Admittedly, we are still not sure if the new government isn’t merely playing for time in order to prepare for an exit anyway. Some of the noises emanating from Greece do suggest that there are certain minimum expectations the government wants to see fulfilled if it is to agree to a continuation of the bailout agreement (apart from changing its name).

Bloomberg reports:

“Greece’s provisional agreement with creditors to avert a default started to crack as European officials said the country’s latest proposals fell far short of what was put forward two weeks ago and Greek ministers floated the prospect of a referendum if their reforms are rejected.

The measures Greece’s government sent to euro-region finance ministers last Friday, including the idea of hiring non-professional tax collectors, is “far” from complete and the country probably won’t receive an aid disbursement this month, Eurogroup Chairman Jeroen Dijsselbloem said on Sunday.

“We definitely still have an immense path ahead of us,” German Chancellor Angela Merkel said during a televised news conference in Tokyo. “We obviously have the political goal to keep Greece in the euro area. But at the same time, there always are two sides to the coin: the solidarity of European partners on the one hand and the readiness to carry out reforms and commitments in one’s own country on the other.”

Greece’s anti-austerity government, elected in January on a promise to renegotiate the terms of a 240 billion-euro ($261 billion) bailout, has to present detailed proposals to European creditors or risk running out of cash as soon as this month. The renewed tensions threaten to temper a rally in Greek bonds sparked by optimism over the provisional accord.

The euro-area finance ministers will discuss how the technical teams can start assessing the proposed reform measures. Greek authorities will hold talks with the creditor institutions in Brussels and Athens, European Commission spokesman Margaritis Schinas told reporters in Brussels.

The country is seeking the disbursement of an outstanding aid tranche totaling about 7 billion euros. Without access to capital markets, its only sources of financing are emergency loans from the euro area’s crisis fund and the International Monetary Fund. Its banks are being kept afloat by an Emergency Liquidity Assistance lifeline, subject to approval by the European Central Bank.

“I can only say that we have money to pay salaries and pensions of public employees,” Greek Finance Minister Yanis Varoufakis told Italy’s Il Corriere della Sera in an interview Sunday. “For the rest we will see.”