Greece Capitulates, Europe Kicks The Can

Yesterday it emerged that the normally hardline European Council president Donald Tusk (the former prime minister of Poland), suddenly felt “debt relief” for Greece was needed after all. While he is undoubtedly correct, it seems to us that he likely received a stern phone call from Washington.


tusk hireDonald Tusk, the life-like android currently presiding over the EU council, here photographed in hardline mode

Photo credit: Radek Pietruszka / PAP


It is also unlikely to be a coincidence that the IMF released its debt sustainability analysis last week, in what appeared to be a case of especially ill-chosen timing, at least from the perspective of the euro-group. Note here that the IMF only wants the EU to provide debt relief to Greece – the IMF itself intends to get back every cent of its Greek loans.

Politicians in neo-con infested Washington no doubt don’t want to let slip Greece away into the arms of its Russian Orthodox co-religionists, which would almost certainly happen after a Grexit. Such strategic considerations are certainly exercising the NATO bureaucracy and very likely the EU’s movers and shakers as well. A Grexit would also be a victory of the Marxist wing of Syriza (a Pyrrhic victory though it may be), which would over time throw Greece’s continued NATO membership into doubt.

According to press reports from this morning:


The White House has been putting its immense diplomatic weight behind a debt restructuring for Greece. Treasury secretary Jack Lew made an intervention earlier this week, and seems cautiously optimistic that Greece’s current proposals should be enough to satisfy creditors, and gain some crucial debt concessions in return.

He told a forum in New York on Friday that “It certainly looks like they’re getting closer,” adding, however, that “they’ve had trouble getting from close to closed. It’s going to be a long slog through the next few days, but it should get worked out. It would be a better thing for the global economy if this thing gets resolved.”


(emphasis added)

We would suggest that the “global economy” is only in second place on Washington’s list of priorities in this particular case, although the market crash in China has probably raised the level of economic concerns as well.


Greek and German YieldsGreek and German 10 year government bond yields compared (via the WSJ) – click to enlarge.


Greek Capitulation

It seems Mr. Tsipras’ negotiating position hasn’t exactly improved after all as a result of the “No” vote in Greece’s referendum. It appears that the proposal Greece has now submitted along with its ESM aid application is substantially the same Greece’s electorate has just rejected.

One thing Mr. Tsipras may actually have achieved however is this: Support for Syriza has soared according to Greek polls, and given that he is the party’s face and its by far most marketable politician (especially with Yanis Varoufakis out of the picture, who ran a close second in terms of marketability), resistance from the party’s Marxist wing may well turn out to be futile. In other words, in spite of capitulating to the EU’s demands, Tsipras has probably managed to ensure his own political survival.


Greek democracyActually, it seems Juncker was right … in the end, it has indeed turned out to have been an irrelevant circus

Cartoon by Steve Bell


In fact, if the EU agrees with Greece’s “new” proposals, Tsipras won’t need the votes of his own party’s rebels to get parliamentary approval in Athens. It appears the survival instinct of his party colleagues is trumping principle anyway – only five Syriza MPs have so far announced that they will vote against a new bailout deal with the EU.

According to press reports, Greece’s opposition parties – excluding the communists and the far-right Golden Dawn – have already promised they will vote in favor of the deal as well. This is not exactly an unexpected development of course. It was always clear that Tsipras would be able to get a deal approved with the opposition’s help. The only question was whether he and Syriza would survive such an event politically, and we now sense that they will. A summary of the salient information from the Telegraph’s Greek news update link:


So it seems for today’s Greek parliament debate, that Tsipras has managed to contain a full-scale revolt over his plans.

Greek paper Kathimerini reports that only 5 rebel Syriza MPs have openly called for a rejection of the deal and the path of Grexit.


Opposition party leader Stavros Theodorakis of centrist To Potami has predicted a “large majority” of lawmakers will approve the government’s proposals to creditors in a crucial vote later. He said there’s no more room for discussions and that the Greek people want a deal ending “the anxiety and the stranglehold” that they feel.

He said a meeting with European Commission President Jean-Claude Juncker Friday left him with the sense that the international creditors feel the Greek proposals are “moving in the right direction.” Theodorakis said some “details” remain that both the Greek government and the creditors have still to iron out.


Looks like ND, Potami & PASOK wll vote Yes for govt’s bailout bill. Only the Communists, the neo-Nazis & [any] Syriza dissidents will vote No (tweet by Yannis Koutsomitis)


“Plenty of political shenanigans going on in Athens this afternoon, as the PM looks to secure the domestic majority he needs for a new three-year bail-out. As we reported earlier, at least five rebel MPs in Syriza have called for the country to reject the deal and leave the euro.

Now, nationalist defence minister, and leader of the junior coalition party ANEL, is meeting with the PM. ANEL have been unhappy about plans to abolish the tax exemptions for Greek islands, but in an an olive branch to the party, Mr Tsipras is not implementing the full €400m in defense spending cuts next year.”


There you have it – “OXI” vote or not, complete capitulation is at hand. Essentially there were always only two possibilities: Either Alexis Tsipras was more of a leftie than he had been letting on and wanted a Grexit from the very beginning in order to establish a Venezuela-type socialist Utopia in Greece, or he was going to have to bend over and take it. In many ways it was actually a “beggars can’t be choosers” situation.


greek-beggarCartoon by Daryl Cagle


Of Debt Restructurings and Russian Pipelines

There is a reason why the euro-group has been so reluctant to grant a debt haircut to Greece. Naturally, all involved parties are fully aware that the Greek public debtberg is way too large – in spite of the fact that €100 billion in Greek debt have already been forgiven in the “voluntary” private sector initiative in 2012.

Although the EU and the ECB haven’t been shy about interpreting treaty rules and statutes that are supposed to govern their actions quite creatively in the course of the crisis, this creativity has limits. The problem with assorted bailouts in the euro area has always been the “no bailout” clause of the EU treaties. Some clever lawyering was applied to get around it: For one thing, an obscure paragraph in the treaties about granting aid in case of emergencies such as earthquakes and asteroid strikes was used to justify granting bailout aid. For another, by structuring the bailouts as loans, it could be argued that they only represented temporary aid as opposed to actual transfers. After all, the money would be paid back.

However, this means that an outright haircut isn’t legally possible, because then the money definitely won’t come back. This would be in conflict with the “no bailout” clause and would likely be rejected by a number of EU parliaments. In fact, it is not yet certain that the new Greek proposals will actually be accepted by all the parliaments in the EU that will have to give their placet. Here is a chart provided by RBS that shows which way various EU governments are leaning with regard to granting another bailout to Greece vs. accepting a “Grexit”:



RBS chartEU countries and institutions prepared to accept a Grexit vs. those that want to avoid it at all costs and those that want to avoid it “if possible”.


If Greece were to default on its debt and exit the euro area (which would become unavoidable once the ECB cuts ELA), it still cannot get out of the debt by e.g. simply declaring it odious, as a parliamentary commission in Greece has recently done. The ECB, the IMF and every country in the EU that has contingent liabilities due to guaranteeing EFSF loans to Greece or has bilateral loans to Greece outstanding, would sue for repayment.


ruinsThe freezing of ELA has probably convinced Tsipras that he had to give in – it would have been extremely difficult to orchestrate an exit from the euro area (a roach motel if ever there was one!). We doubt Greek depositors and savers would have forgiven him for the haircut they would have suffered.

Cartoon by Morin


Greece would find it extremely difficult to repay these euro-denominated debts. This not only applies to the government, but also to the private sector. The economy would come under severe stress. If the government were to try to simply refuse paying its debt by declaring it odious, it would end up a pariah in the capital markets for years to come. Obviously, this would make it even more likely that Greece would eventually have to link up with Russia, with which it is incidentally about to strike a deal over a gas pipeline.

According to the FT:


“Panayotis Lafazanis, the firebrand leftist energy minister, presented preliminary plans for the project to Greek energy executives in Athens on Thursday in a defiant speech, vowing the government would not be pushed around by EU institutions. EU policy makers are concerned that Russia could take advantage of the crisis to pull Greece deeper into its orbit, and pipeline politics is critical to relations between the two nations.

Athens and Moscow say the new project, the so-called South European Pipeline, will bring 47bn cubic metres annually of Gazprom’s gas into Europe after 2018. Mr Lafazanis — the political patron of Greece’s biggest public sector company, the Public Power Corporation, which holds a near-monopoly of its electricity market — pledged it would create 20,000 much-needed jobs in Greece.

The promised deal with Russia is a sharp rebuke to Brussels, which wants to reduce EU dependence on Gazprom and argues that southeastern Europe should diversify its supply by prioritizing gas from Azerbaijan.

Opening his remarks with pugnacious references to the eurozone crisis, Mr Lafazanis said Greece was aiming to secure a deal with Brussels as quickly as possible. But he warned EU institutions that Athens was not about to roll over.

“Greece is no one’s hostage,” he said. “The Greek people’s No vote, and I am referring to all of the people, is not going to become a humiliating Yes. Greece is not, under threat of execution, ready to accept any fait accompli.” He said an energy deal with Russia was an important component in Greece’s “multi-faceted” foreign policy.”


(emphasis added)

Actually, the EU’s insistence that gas from Azerbaijan is somehow preferable over Russian gas is utterly absurd. We’re not exactly big fans of the Marxist Panagotys Lafazanis, but we have little doubt that Russia is the more reliable gas supplier. The EU’s resistance to Russian gas deliveries is in any case largely masterminded by Washington and has more to do with US geopolitical goals than any alleged disadvantage Europe has from buying Russian gas.

Even during Soviet times, Russia has always been an extremely reliable supplier. The route gas pipelines must take from Azerbaijan makes this option an extremely risky prospect by comparison. We obviously couldn’t care less about the US military-industrial complex pining for a new enemy in the form of Russia to keep its profitable war racket going – and this would be the proper attitude for Europe as well.

Anyway, Greece needs money, and while making money with gas from Azerbaijan is a distant prospect (more of a pipe dream, actually), Russian money would arrive very quickly.

As to debt restructuring – even Ms. Merkel has in the meantime acknowledged that a restructuring will be required. However, for the reasons outlined above – the EU treaties and the political impossibility to get a number of EU member countries to agree – she continues to dismiss an outright haircut as not viable. In the end, it really makes no practical difference, as a further stretching out of debt maturities will mean that the real value of the debt will be eaten up by inflation. And if there is one thing we can be certain about, it is that the ECB will provide plenty of inflation – as can be clearly seen from the chart below:


TMS-euro areaTrue money supply growth in the euro area has just shot well above 13% – the ECB is inflating the money supply on steroids – click to enlarge.



We can probably consider the dreaded “Grexit” as being once again postponed. The only potential problem to the proceedings may still be posed by national parliaments, not all of which may be inclined to play ball, but this is actually a rather remote threat. Most likely the proposals forwarded by Greece will find favor with the EU, as the euro-group has already commented that the new plan is “thorough”. In other words, the can is about to be kicked down the road again – which has always been the odds-on bet, even though things have probably never come closer to an unexpected resolution than this time around.


famous last wordsBack in the early 2000d’s, an innocent little question occurred to some …

Cartoon by Robert Ariail


Charts by: RBS, ECB, WSJ

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