Greek Capitulation Not Good Enough for Schäuble & Co. Grexit Unavoidable

Yves Smith for all the arrows she has absorbed for her pessimism about the bargaining positions of both Greece and her creditors has for the must part been reliably on the money. This morning she writes that "A Grexit Looks Almost Inescapable":

Despite my generally dour outlook, I never thought we’d arrive at the insane juncture we are at now, that of a Grexit being all but baked in. This would be a catastrophic outcome, most of all for the Greek 99%. If a Grexit comes to pass, it should deservedly blacken the names of everyone involved, most of all Merkel, whose incrementalism meant that all of the unresolved contradictions of the Eurozone produced intensifying pressure on its fault lines, and Greece proved to be the breaking point. But as we’ll see soon, her finance minister Wolfgang Schauble would also get a particularly large badge of dishonor. 

You don’t need to know much to know that the odds of Greece escaping a Grezit are becoming vanishingly small as time progresses, and there is perilously little time left. And mind you, this sorry trajectory is occurring even after the Greek government prostrated itself and offered to meet even more stringent conditions than its voters overwhelmingly rejected in a referendum less than a week ago.

The big development is that last night's meeting of eurozone finance ministers adjourned minus any resolution. As James Kanter reports in "Meeting on Greece Debt Breaks Up With No Deal" the hardliners -- Germany, Finland, Slovakia, et al. -- don't believe that Greece will implement its latest austerity proposal:

Despite Greece’s capitulation on those terms, many countries came into this weekend’s final round of negotiations skeptical of the Tsipras government’s commitment to seeing through the changes and putting his country on firmer financial footing — and weary of the constant brinkmanship that has characterized the months of negotiations over Greece’s latest crisis.

Instead of working through the night to hammer out a statement on requirements for Greece, as had been expected, the meeting was suddenly called off shortly before midnight, and ministers left without even holding a formal news conference.

“The issue of credibility and trust was discussed, and also of course the financial issues involved,” Jeroen Dijsselbloem of the Netherlands, the head of the so-called Eurogroup of ministers, told reporters. “It is still very difficult. but work is still in progress,” he said, adding that discussions would continue later Sunday morning.

From the start, it was clear that Mr. Tsipras’s gambit had not entirely won over Germany and other countries that have been skeptical about giving a new round of loans to Greece after years in which successive governments in Athens have struggled to carry out changes that creditors have demanded as a condition of the bailouts.

“We will have exceptionally difficult negotiations,” Wolfgang Schäuble, the hard-nosed German finance minister, said on Saturday before the meeting. “We won’t be able to rely on promises.”

His prediction proved accurate, as he and fellow ministers wrangled with little apparent progress, seeking more assurances from Greece that it was committed to changing its ways, and weighing the desires of France and Italy for a deal against the more skeptical stance of Germany and the possibility of outright opposition from Finland.

What Schäuble did do in the 11th hour was forward a proposal demanding that Greece essentially be placed in receivership and banned from the euro for five years. According to The Guardian's Ian Traynor in "Greece nears euro exit as bailout talks break up without agreement," who Yves Smith quotes at length in an update to her post,

With Greece on the edge of financial and social implosion, eurozone finance ministers met to decide on the country’s fate and on what to do about its debt crisis, after experts from the troika of creditors said that new fiscal rigour proposals from Athens were good enough to form “the basis for negotiations”.

But the German finance minister, Wolfgang Schäuble, dismissed that view, supported by a number of northern and eastern European states. “These proposals cannot build the basis for a completely new, three-year [bailout] programme, as requested by Greece,” said a German finance ministry paper. It called for Greece to be expelled from the eurozone for a minimum of five years and demanded that the Greek government transfer €50bn of state assets to an outside agency for sell-off.

Timo Soini, the nationalist True Finns leader, meanwhile, threatened to bring down the government in Helsinki if Alex Stubb, the finance minister, agreed to a new bailout for Greece. Stubb apparently came to the crunch meeting on a new bailout without a mandate to agree one.

“The hawks are very vocal,” said an EU diplomat. “It’s very tough.” Berlin also demanded stronger and more intrusive powers for outside monitors to police the economic and fiscal reforms that Alexis Tsipras, the leftist Greek prime minister, would need to commit to to secure the new bailout.

Saturday night’s talks were not to agree on a third bailout, but were negotiations on whether to launch more talks on Greece’s third rescue package in five years. The ministers faced formidable problems, said Schäuble, who argued debt relief for Greece, broadly seen as essential, was banned by the EU treaties: “Athens’s proposals are far from sufficient. The funding gaps are way beyond anything we’ve seen so far,” he said.

The hard line was echoed by Peter Kazimir, finance minister of Slovakia, who said that new austerity measures tabled by Athens were already past their sell-by date.

The eurozone has been united for five months in the negotiations with Tsipras, but with the stakes rising greatly in the last 10 days, major divisions have surfaced, with the French working tirelessly to save Greece and the hardliners now pushing Greece’s expulsion for the first time openly.

The European commission and the European Central Bank issued dire warnings that a failure to grant Greece new rescue funds of up to €78bn would put the country on a trajectory of complete banking and financial collapse.

The widening gulf between eurozone hawks and doves paves the way for an acrimonious summit on Sunday, with France and Italy lining up against Germany and the northern and eastern Europeans. Matteo Renzi, the Italian prime minister, is expected to tell chancellor Angela Merkel that enough is enough and that Greece should not have to put up with any more humiliation.

Merkel is under intense pressure from the Americans not to “lose” Greece and is worried about her own legacy. But Greece fatigue is becoming endemic in Germany, and she faces growing unrest in her party ranks where Schäuble’s hard line is popular. She was said to have endorsed Schäuble’s tough position.

Whether the U.S. can work its will once again on a reluctant Merkel, as it did in the case of Russian sanctions and the whole smorgasbord of riots, a coup and the downing of the MH17 passenger jet, seems a long shot to me.

The Obama administration has not been particularly assertive about securing an amicable resolution to the Greek debt crisis. Getting the IMF to release its report saying Greece's debt load was unsustainable and that debt relief must be considered was helpful to Syriza in the run up to last Sunday's referendum, but it was far from the kind of full-court press trotted out to get the EU to embrace sanctions on Russia.

The U.S. is allowed to run roughshod over Europe when it comes to NATO force projection. But when the question is Germany's economic hegemony over the continent, Uncle Sam apparently has to wear velvet slippers.

Schäuble's 11th-hour proposal, one that Traynor says Merkel has signed off on, at least clarifies the root of Germany's incessant demands for austerity. It is not about a belief that austerity will lead to growth; that has been debunked long ago. It is about taking possession of Greece lock, stock, and barrel. Likely in the private moments of hardliners among the Finns, Germans and Slovaks are thoughts about Greek women. Why not put the young fertile ones on the auction block too?

Deadlines: Greek Debt Negotiations & P5+1 Talks

So we're back to deadline watch in the Greek debt drama. The new make-or-break deadline we're supposed to stay focused on is July 20. That is when 3.5 billion euros that Greece owes to the European Central Bank comes due. If Greece fails to make repayment by July 20, the ECB will be hard pressed to find a way around cutting off liquidity to already cash-strapped Greek banks.

James Kanter publishes a helpful story this morning, "Greece Expected to Offer Proposals as Eurozone Leaders Prepare to Meet," that precedes yet another emergency summit of eurozone leaders in Brussels today. Kanter tilts towards the neoliberal consensus. So his writing is a helpful prism to understand how the U.S./EU elite view recalcitrant Greece:

BRUSSELS — The Greek government was expected to make proposals to eurozone leaders on Tuesday to support its battered economy and keep the country in the single currency area, as Athens and its creditors resume their struggle over an elusive solution to Greece’s long-running economic crisis. 

But a quick fix for Athens looked extremely difficult to achieve. The stakes were rising on Tuesday ahead of the latest emergency summit meeting of European leaders. None of them wants to take the blame for a possible sudden, chaotic departure from the eurozone by Greece. That means that all sides could agree to keep talking even as the crisis reaches new levels of intensity, and even as Greece hurtles toward a deadline — a payment of 3.5 billion euros, or about $3.9 billion, to the European Central Bank on July 20 — that most observers think it cannot miss without leaving the eurozone.

The Eurogroup of finance ministers is scheduled to convene at 1 p.m. in Brussels, followed by an emergency summit meeting of the 19 leaders of eurozone countries at 7 p.m. that is expected to include Mario Draghi, the president of the European Central Bank, and Jeroen Dijsselbloem, the president of the Eurogroup.

*** 

A failure to make good on the July 20 bailout payment to the European Central Bank would make it almost inevitable that Greece would have to cut a lifeline for the country’s cash-drained banks. And that could force the country to print a parallel currency that would hasten its departure from the currency bloc. 

That prospect could add pressure on the Greeks this week to commit to a number of short-term changes for bridge financing to avoid defaulting on the European Central Bank, and then conclude a wider program, with debt relief, later in the year. 

But one analyst emphasized on Tuesday that the track record of the government in Athens would make it extremely difficult to take any of its commitments at face value. 

“It remains very unclear whether the Greek government is really trying to avoid an exit from the euro area, or whether it only wants to avoid being held responsible for it by its domestic public opinion,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels.

I used to be of the opinion that what Tsipras was up to was transforming consciousness in Greece -- enlightening the Greek voter -- to accept the reintroduction of the drachma. But I no longer believe that. I think that Syriza, true to what Tsipras and Varoufakis have long said in public, has no intention of leaving the eurozone. The strategy of Tsipras has been to wear down the members of the troika, and in this he has been successful. France has moved away somewhat from Germany. The IMF has broken with other members of the troika and issued a report declaring Greece's debt load unsustainable.

The problem for Tsipras is that despite the landslide "Oxi" win, the July 20 ECB repayment deadline looms large. For the hardliners in the Eurogroup who want to collapse Greek banks and be done with it, two weeks is a short time to wait. There is no need for Schauble and Dijsselbloem to offer any concessions, particularly on debt forgiveness. It appears that Tsipras will run out of time and no cavalry will ride over the hill to the rescue.

And not one but two deadlines have now been breached in the P5+1 talks in Vienna: first, the June 30 deadline, and today's July 7 deadline. The significant one for Kerry and Obama is Thursday July 9. If no agreement is reached with Iran on its nuclear program in two days then the U.S. Congress will get an additional 30 days to skewer the agreement. USG scribe Michael Gordon reports in "Iran Nuclear Talks Are Extended Once Again":

VIENNA — The talks to complete a landmark accord limiting Iran’s nuclear program have been extended for several days after negotiators acknowledged that they would be unable to meet a Tuesday deadline.

To give negotiators more time to pursue a final accord, the diplomats agreed to extend through Friday an interim nuclear accord called the Joint Plan of Action. That interim agreement, which had been set to expire on Tuesday, freezes much of Iran’s nuclear program in return for modest sanctions relief.

“We are continuing to negotiate for the next couple of days,” Federica Mogherini, the foreign policy chief for the European Union, told reporters here.

This is the second time the talks have been extended since Secretary of State John Kerry arrived here in late June. The original goal was to complete a final accord by June 30.

Ms. Mogherini said that the negotiations had entered “a difficult and sensitive” phase, but she did not discuss the remaining issues.

The unresolved issues in recent days have included what limits would be placed on the development of more efficient types of centrifuges after the first decade of an accord, what steps would be taken to address suspicions about Iran’s past nuclear activities, and the timeline for removing sanctions.

The Obama administration hoped to finish the accord by Thursday, so that it could be submitted to Congress for a 30-day review. If the agreement is finished this summer, the duration of the review period will double.

I don't see Obama walking away from the table. He wants an agreement, not only for his "legacy"
but for the future electoral viability of the Democratic Party. Not much is made of it in the media, but the Democrats' nominal association with a less bellicose foreign-policy perspective is a huge vote-getting advantage. A Democratic administration does not want to squander this.

But give the media monopoly and a Saudi- and Israeli-dominated Congress two months to inveigh and fear-monger, and the chances are high any agreement will be scuttled, which puts the feckless Obama in the difficult position of having to veto a Congressional override to protect his "legacy" agreement. 

It is hard to say at this point which is a stronger character trait in Obama: his desire to go-along-to-get-along or his lust to be inscribed in the history books. Probably the latter. So maybe there is hope for a Iranian nuclear accord after all.

Neoliberalism Unbowed: Obama Gets Fast Track and Tsipras Accepts Austerity

Two big dollops of bad news to process. First, Obama was able, with the assistance of senate GOP majority leader Mitch McConnell and 13 Democrats, to push through a critical vote on trade promotion authority, a.k.a., fast track (Jonathan Weisman, "Trade Accord, Once Blocked, Nears Passage"). Even The New York Times editorial board, always a staunch supporter of anything having to do with free trade, sounds a note of trepidation ("President Obama Must Use Trade Authority to Reach Better Agreements"):

To secure broad and bipartisan support for trade agreements, the administration needs to reach deals that address the legitimate concerns raised by many Democrats. The deals must contain strong and enforceable provisions on workers’ rights and the environment. They should bar, or at least strongly discourage, countries from manipulating their currencies to bolster exports at the expense of businesses in other countries. And the deals must not contain overreaching investor protection clauses that allow foreign businesses to file frivolous and abusive arbitration claims against governments by contending they were hurt by laws and regulations. Philip Morris Asia, for example, has used investor provisions in other treaties to challenge tobacco policies in Australia.

This is all whistling pass the graveyard. As I opined previously, the Democrats are in serious trouble if the Trans-Pacific Partnership passes, something which seems a done deal now that Obama is about to get fast track. Democrats are looking at shrunken numbers in Congress. So far unions are standing by a pledge to block donations to any member of Congress who votes for trade promotion/TPP. I am not confident that this pledge will hold up into next year when some lukewarm friends of labor like senator Maria Cantwell are in tough reelection fights. Nonetheless progressive rank-and-file support for Obama, the Democratic Party, and, by association, the S.S. Clinton will be hard to come by.

But the second item of bad news, a truly depressing development that surfaced on Monday, is that Greek leader Alexis Tsipras capitulated to the troika and proffered an austerity package of increased taxes and pension cuts. Yves Smith summarized on Monday in "Short Greece Proposal Update: Greece Folds":

Note contrary to earlier media reports, it technically does not lower pensions payments but does reduce pension spending by requiring higher contributions, including payments from retirees themselves. As the Guardian’s Athens reporter, Helen Smith, notes: 

……there’s a hefty increase in revenues from VAT over the next 18 months.

Greece has also accepted that pension must be reformed, and is planning a hike in pension contributions and an increase in health contributions from retirees. However, it appears that actual pension rates won’t be cut, allowing Athens to argue it has kept to its red line.

Another quick verdict is that “pensions are almost spared“. And while European leaders are urging their peers to consummate a deal, it’s not clear these pension moves will be enough to satisfy countries like Slovaka, which have said they can’t stomach financing Greece’s more generous pensions. One rebellious country could probably be shamed into line, but we have yet to hear of the reactions from the real hardliners like Finland and Spain, since the summit has just begun.

The Tsipras capitulation is very Obamaesque in that on the surface it does not reduce pension payments, but on the back end there are an increase in fees, such as the requirement that pensioners shoulder more responsibility for healthcare costs. Similarly, while Obamacare has increased Medicaid enrollment, it has all but wiped out the full maintenance of benefit healthcare plan that used to be the default blue-chip industry standard. Now 70/30 or 80/20 co-insurance is the new normal. You might not have a premium share but it amounts to the same thing if you go to the doctor.

Smith wrote yesterday ("Deal With Greece Still Looks Wobbly") that the Tsipras capitulation in no way guarantees that the debt deal with the troika is home free. Apparently German Finance Minister Wolfgang Schäuble is calling for even more Greek flesh. And Jim Yardley reports today ("Greek Debt Blueprint Gets a Cold Reception in Athens") that Tsipras faces a revolt from Syriza members in parliament:

“This makes life worse for ordinary citizens,” said Despoina Charalampidou, a Syriza lawmaker who is now a deputy speaker of Parliament. “The measures constitute austerity.” 

Sitting in her office in Parliament, Ms. Charalampidou stressed that the negotiations were continuing. She did not rule out supporting a final deal, especially if it included concrete European promises to reduce Greece’s public debt, estimated at around 320 billion euros, and provided structural funds to stimulate economic growth. 

“Otherwise, I don’t think it will pass,” she added. She said the prime minister was facing a “very complex, even insurmountable task.” She blamed European creditors for using negotiations to send a stern political message about challenging austerity, saying that they “want to humiliate the Greeks for the choice they made on Jan. 25,” a reference to Election Day. 

Harry Papasotiriou, a political analyst in Athens, predicted that most Syriza members would ultimately toe the line and support any deal endorsed by Mr. Tsipras. “He’ll survive politically, but down the road, he could suffer,” Mr. Papasotiriou said. 

Adonis Georgiadis, a member of the New Democracy party, which is now in political opposition after being voted out of the government in January, pounced at the chance to affix Syriza with the stain of austerity. “If this is not an austerity measure, can you explain what austerity is?” he asked. 

In the eyes of many Syriza leftists, any compromise that constitutes a major departure from their election mandate to roll back austerity is considered politically risky. 

Even though the negotiations have been ugly, Syriza remains popular, especially Mr. Tsipras, as many ordinary Greeks have relished the confrontation with Europe. But that has also placed Syriza in a tough political spot, since most analysts say compromise is inevitable if Greece wants to remain in the eurozone. 

“These measures cannot be voted for,” Alexis Mitropoulos, another Syriza lawmaker, told the Greek media on Tuesday. “This package that you have in your hands cannot be the one to be presented in Parliament.”

At this point I am inclined to think that Syriza members in the parliament are not as corrupt as the Democrats in the senate and that Tsipras will not being able to win approval for his capitulation to the troika. My thinking here is guided by the Sunday New York Times Magazine feature on Yanis Varoufakis that appeared in May. In that article finance minister Varoufakis was categorical: There would be no cuts to pensions; and if there were, he would resign from the government.

So we are at the point that either Syriza revolts and maintains its legitimacy as a standard bearer for a left alternative to neoliberal austerity, or it goes along with the Tsipras capitulation and another promising popular progressive movement is subverted.

Greek Debt Negotiations to Muddle Along, But Things Actually Looking Up for Syriza

It is Monday morning which must mean that there is a meeting in Brussels between eurozone finance ministers and Yanis Varoufakis' Greek negotiating team. Tomorrow is the deadline for repayment of 750 million euros to the IMF. Last week Varoufakis said Greece would make the repayment. The ever-skeptical Yves Smith of Naked Capitalism is not so sure. As she argues in her post today, "Greece Finally Threatens Default as Deal with Creditors Remains Remote,"

The ruling Greek coalition appears to have finally woken up to the fact that it it cornered. As we indicated, the longer the creditors keep Greece in the sweatbox, the more its popularity is destined to decline. 

While the latest polls still show Syriza as the most popular party, its support is now at 36%, a round trip from a huge surge after the government took office to back to where it stood when it was voted into office. Approval ratings of the government’s strategy have dropped precipitously from the very high levels reached shortly after the new government took office. As e pointed out early on, the best strategy for the creditors was simply to remain non-negotiable. Either Syriza would capitulate to their demands, or the government would lose support, paving the way for the return of a more complaint coalition. Syriza appears to realize that following the inertial path of trying to extend its negotiating runway does not work in its favor. Even if Greece were to pull a rabbit out of the hat and make the €750 million IMF payment, it has a total of €1.5 billion coming due to the IMF in June, which it almost certainly can’t satisfy if it fails to unlock the bailout funds.

Yves Smith seems to think that Syriza can either make the IMF payment tomorrow and risk having to issue scrip to pensioners and government workers at the end of the month, or it can stiff the IMF, a course of action that would not immediately precipitate default and Grexit. As Smith explains:

The situation is more fluid than it appears. The odds are high that blame game political calculations will win over sound policy. We’re already seeing jockeying starting to take place. Notice Schauble’s “justifiable conditions” caveat. He’s made clear repeatedly that he’d just as soon see Greece leave the Eurozone, but no one, particularly Merkel, wants to be seen to have pushed Greece out. Thus if Greece plays its cards so it can be depicted to have brought the default (and if it comes to that, an exit), that works to the advantage of the hardliners who see Greece as disposable and believe a default/possible exit can be made painful enough for the Greek people so as to make any other country that might contemplate leaving the Eurozone to see that alternative as too costly.

Despite the continued impasse, and virtual certainty of a default on Tuesday [!], the creditors have quite a lot of choices and options. For instance, despite the IMF’s tough talk about not giving Greece any grace period on a default, an IMF default is not as fine a trigger event at a private sector bond default. As the Financial Times explains:

But that hard line masks a little wiggle room created by the IMF’s own procedures. Under the official timeline plan, it is not until a month after a missed payment that the managing director formally notifies the board and not until three months afterwards that a formal statement to the outside world is expected to be made.

In other words, even if Greece defaults on the loan repayment to the IMF, things can continue to muddle along as they have. The June repayments are larger than this month's. But if missed payments can play out over months before a default is officially declared, there is no reason why this can't repeat itself next month.

In the Business section of today's "newspaper of record" is a slightly more sanguine treatment of the Brussels negotiations. Peter Eavis, Jack Ewing and Landon Thomas, "I.M.F. and Central Bank Loom Large Over Greece’s Debt Talks," see a chink in the troika's armor, and it is not the wiggle room on IMF repayments; it is the risk aversion of the European Central Bank:

It would of course also be a high-stakes gamble for Greece to do anything that could undermine relations with the central bank, which is shoring up Greece’s banking system. It has lent Greek banks more than €110 billion, cash the lenders need to operate but would have trouble raising on international money markets. 

The support to the banks is not the debt that the officials in the Greek government would consider for default. Instead, the idea would be to not repay Greek government bonds held by the central bank. Greece is scheduled to repay nearly €7 billion on those this summer. 

If the Greek banks could not repay their central bank loans, the losses would be passed on to other eurozone countries. An outcry would come from Germany and other countries already fed up with what they regard as Greece’s misbehavior. The central bank’s credibility — probably a central bank’s most important asset — could be damaged. 

Still, the central bank’s deep caution about financial stability would most likely limit how hard it pressed Greece. As the guardian of the single currency, the central bank may not want to do anything that could set off a chain of catastrophic events in Greece’s banking sector that could lead the country to quit the euro. 

“The E.C.B. does not want to be responsible for precipitating a crisis,” said Mujtaba Rahman, practice head for the European Union at Eurasia Group, a political consultancy. “They are very, very concerned about having blood on their hands.”

I know at the end of April when last I wrote about this I said climax was near. Then it looked impossibile that Varoufakis could scrape together the 750 million euros due the IMF on May 12. At the time there was the brouhaha over Varoufakis' obstreperousness; things seemed to be at an unbridgeable impasse and something was going to fracture. But then Tsipras organized a deft cosmetic reshuffling of the bargaining team, with Varoufakis nominally sent to the sidelines, and that seemed to cool things down. Also, I had no idea just how wide the nonpayment wiggle room to the IMF is. Things can continue to go on as they have for months.

Syriza will get some rhetorical help from the Scottish National Party blasting away at austerity. And there is evidence that the U.S. is extremely jealous of Russian pipeline overtures to Greece. So all in all I am more hopeful of some sort of resolution that favors Greece than I have been in months.