Greece and the Troika: Climax Near

Each week since January when Syriza won the election in Greece and formed a new government I have been looking forward to some sort of climax to the battle with the troika and the troika's neoliberal austerity diktats.

If Syriza buckles, and, contrary to all that Tsipras and Varoufakis have promised, accepts the austerity diktats of the troika, the government will fall and we can get on with seeing what to do next. If the troika buckles, and accepts Syriza's non-austerity plan to pay off its creditors, there will be a much-needed crack in reigning neoliberal orthodoxy, a ray of sunshine for non-traditional democratic movements such as Podemos in Spain.

But week in and week out there has been no resolution as acrimonious negotiations have ground along with very little movement if any between the parties.

Now, finally, we seem to be in the home stretch.

I know it seems like we've been here before. But I think this is really it. And not just because of the public display of acrimony in Riga this past Friday (James Kanter, "Eurozone Ministers Admonish Greece for Slow Progress on Overhauls"). As Kanter makes plain, the issues have finally been distilled to the simplest elements. The neoliberal orthodoxy wants Greece to sacrifice pension benefits. Syriza has no more wiggle room because a €750 million payment to the IMF is coming due on May 12:

The frustration with Greece is boiling over more than two months after the international lenders gave Athens until late June to present plans for reforms that would both ease austerity and overhaul its economy. 

The lack of agreement on those plans means European lenders will not release the next allocation of bailout money — a 7.2-billion-euro, or $7.5 billion, payment — to keep the Greek government running and avoid a potential default. 

Mr. Dijsselbloem said it was up to Mr. Varoufakis and his government to present more ambitious proposals, noting that the next scheduled gathering of the Eurogroup would be on May 11, a day before Greece must pay €750 million to the International Monetary Fund as part of its loan agreements.

There was “a great sense of urgency around the room,” acknowledged Mr. Dijsselbloem. 

As negotiations have continued between Greece and representatives of its creditors in recent weeks — meetings separate from the periodic gatherings of the finance ministers — the two sides are said to remain divided on significant issues. Greece has insisted that it cannot cut pensions any further or accept creditors’ demands for a budget that would require a relatively high primary surplus — a surplus when debt repayments are not taken into account.

Greek officials have insisted that these issues are “red lines” that cannot be crossed, and Mr. Varoufakis underscored them in his comments to reporters in Riga.

Some of the antagonism between the Eurogroup and Greece stems from continuing disagreement over whether lenders can conduct fact-finding at Greek ministries in Athens, to verify the true state of the country’s finances, for example, rather than meeting in hotels with Greek officials.

A Finance Ministry official in Athens on Friday, speaking only on the condition of anonymity because of the political tensions surrounding the discussions, said that the Greek government was “not bluffing” in opposing tough measures and was intent on protecting the country’s interests.

Mr. Varoufakis, speaking separately to Greek reporters in Riga on Friday said that the country had submitted a new, revised list of reforms at a discussion between deputy finance ministers this week — but that the document had not been presented to the Eurogroup for procedural reasons that he derided as unnecessarily complicated. He accused eurozone officials of “undermining tactics” and “negativism” and said the climate in Friday’s meeting had been tense, although he denied reports by some news media that officials had verbally attacked him.

Naked Capitalism's Yves Smith has a must-read article this morning, "Eurogroup Demands Varoufakis’ Ouster; Trajectory Toward Default Continues." It is less sneering in tone than her usual posts, which have been very skeptical of the Syriza-led government's negotiating position. Of late, Smith has chosen to emphasize, helpfully, that Tsipras and Varoufakis are moderates, and that about one-third of their governing coalition is to their left; hence, there is little possibility that Tsipras will suddenly kowtow to the troika:

The problem, as we’ve said before, is that the government is boxed in by its coalition members. Even if the moderates in Syriza wanted to make concessions (and Tsipras and Varoufakis are both moderates), they need the support of the hardline left Syriza members, which are about 1/3 of their bloc. And they won’t give in. They’ll bring down the government first. 

What are the bones of contention? We have said that the new government has repeatedly tried end-running the process set forth in the Eurogroup memo, which was for the government to produce a detailed list of structural reforms which would then be approved by the members of the Troika, and finally by the Eurogroup before the bailout funds would be released. The Greek side has instead tried going directly to the Eurogroup to get draft memos approved, going to the European Commission, and going to Merkel, now twice. That’s fed the Eurocrat complaint that the Greeks have wasted time. The various reform lists that the Greek government has produced so far have been dismissed as insufficiently detailed. Just based on media reports on their length, that beef seems to be valid. 

But does that mean the solution is to let the bailout monitors beaver away? While Varoufakis’ detractors may have a point that he wants to negotiate too many issues at the key policy player level, the fact is that the two sides have no agreement at a high level. How does it make sense to work on details?

What appears to be in the offing over the  next several weeks is a default by Greece when it can't re-pay the IMF loan; then it will be up to the ECB to force a Grexit by either cutting off entirely or making further Emergency Liquidity Assistance (ELA) to Greek banks so onerous that Greece will have to leave the eurozone. As Yves outlines for her readers:

Defaulting in May is particularly bad for Greece. The Greek public is overwhelmingly opposed to a a Grexit, and as we’ve indicated, it’s the ECB, and not the Greek government, that determines whether a default means a Grexit.

*** 

The Greek government appears to be in denial or paralysis. Officials have made conflicting statements on whether the ruling coalition is willing to hold its ground even if the cost is leaving the EU and on whether the government will have a referendum to resolve the matter if talks break down. On the referendum matter, financial time is already moving faster than political time. In most countries, the process for conducting a referendum involves lead time (a Parliamentary vote and a period of time, often Constitutionally mandated, before polling). With a default likely in early May, and a deal needing to be agreed at breakneck speed to avert that, Greece would seem to be past the point where a referendum could inform decisions.

Diane Shugart points out in a later tweet that the Kapa poll shows Syriza support at 36.9%, or virtually the same level they had when voted into office. However, that is a big drop from recent ratings.

While the cost of a Grexit would be extremely high in economic terms (I’ve seen a forecast of a fall of 20% in GDP, worse than anyone anticipates from continued austerity), Kouvelakis contends that citizens have been given only one side of the story:

The main element fueling this troubled atmosphere is, however, the fact that the scaremongering on the theme of the “Grexit” remains unchallenged at the level of broad public opinion. The right-wing opposition and the mainstream media, increasingly hostile to the government and using all possible arguments to push it towards full surrender, associate the break with the eurozone with an apocalypse — as they have done relentlessly since the start of the crisis.

But the response on the part of the government tends to be that this perspective will be avoided thanks to the “honest compromise” to which the Europeans will finally have to agree. Hardly a discourse, to say the least, that can mobilize Syriza’s base and prepare society for an eventual rupture with Europe.

Both Greece and its creditors look to be sleepwalking into a breakup that both profess they want to avoid. But the mutual distrust and denigration are classic divorce dynamics, and there is no relationship counselor in the mix. Tsipras is right to regard Merkel as his best, or more accurately, only hope, but the fissure may be too far advanced for her to paper it over, assuming that she is willing to do that.

In this scenario, default leads to a Grexident because the parties at this point after months of impasse are thoroughly alienated from one another.

I don't want to seem brutally cavalier -- because a further 20% drop in GDP for Greece already reeling from a depression will be cataclysmic -- but it is high time that something gives here. If Syriza can't deliver on what it promised, an end to austerity, new elections should be called. If the troika is so addicted to austerity, let it force Greece out of the eurozone and bring on the market response.