Greece has returned in the spotlight again. Since the hard left government of Alexis Tsipras took office in January, tough negotiations on structural reforms, between the new government and Greece’s international creditors, began and they are still ongoing. Fresh worries are now driven by the risk of a partial default of Greece, which desperately needs the last €7.2bn tranche of the 2010’s bailout in order to meet the forthcoming payments due to its international creditors. Indeed, the Greek government is required to repay about €1 billion in May and another €1.6 billion in June.

Nevertheless, the Financial Times reported the IMF rejected an informal proposal to postpone the first payment. Negotiations between the so-called Troika – the International Monetary Fund, the European Central Bank and the European Commission – and the Greek government are taking place in order to reach an agreement over structural reform that would unlock the last bailout tranche providing Greece with fresh air and thus avoiding a default. Concerns over Greece’s solvency have pushed the 2-year government bond yield over 30% on Tuesday.

Greece 2-year

Greece 2-year

Having said that, the next step concerns the definition of the different interests in play. It should be clear the Troika is vividly pressing the Prime Minister to comply with the conditions previously agreed by the former government during the 2010 bailout. In a nutshell, the bailout package mainly concerns austerity measures going from privatizations, labour reform and public-sector job cuts. On the other hand, Tsipras was elected primarily because of his pledge of renegotiating these unpopular measures.

In light of these elements, this could seem an endless debate. Nonetheless, the broader picture is a little bit more complicated. The Greek Prime Minister has to account for his people’s support for Greece’s membership in the European Union, especially as such a support has even grown since the formation of the new government.

Bearing in mind the motivations driving the two parties, it could be interesting to analyse the three possible outcomes of these negotiations. First of all, Greece and its international creditors – the International Monetary Fund, the European Central Bank and the European Commission – could reach an agreement over structural reform avoiding a default. On the contrary, in case such an agreement is not reached, Greece would be out of cash, some analysts say, as soon as mid-May, when a €770 million payment to the IMF is due.

In case of a Greek default, the urgent question would be whether Greece would exit the Eurozone or not. The so-called Grexit would have terrible consequences on the short term for the Hellenic nation. Indeed, a return to the Drachma would slash significantly Greeks’ wealth and purchase power and could probably lead to a double-digit inflation. A weaker currency is certainly going to boost exports but at the same time will determine import prices spike. Moreover, the exit will be the driver of a social wealth distribution. As a matter of fact, Euro denominated debts are obviously going to burden on a certain social group as debt repayment would become more costly due to a lower value of the drachma. Conversely, creditors to foreign agents will benefit from the Grexit, since they are going to receive the same cash flows but denominated in a stronger currency.

In addition to that, Greece leaving the Eurozone would be a serious blow to the stability of the Eurozone itself, as it would signal the reversibility of the Euro, becoming a precedent for future exits. In light of this possibility, markets could face a huge capital flight to safe havens, experiencing a dramatic sell off of peripheral government bonds, such as the Italian and the Portuguese ones as these countries would be seen as the next – most likely – to default. On the other hand, allowing Greece to remain in the Eurozone even after a default could enhance moral hazard, sending other peripheral members of the Eurozone the message that misgovernment, clientelism and corruption are tolerated since the bailout “life jacket” is available.

The scenario depicted is certainly critical in order to understand the possible moves of the actors in play. Let’s start saying that the two parties are looking for different outcomes for the negotiation. On the one hand, as previously stated, the Troika hopes in an agreement based on solid economic reforms, which will hopefully help to stabilize the debt in the long run.

On the other, Tsipras is aiming at renegotiating the tough conditions imposed and agreed by the previous Prime Minister. Any negotiation involves tactics and the Greek one could be deemed as pretty provocative: Greece’s finance minister, Yanis Varoufakis, publicly acknowledged that the country’s problem does not concern a temporary liquidity shortfall, but insolvency. What credible debtor would even say that? A debtor willing to default, indeed. This attitude put Tsipras in apparent position of strength. As a matter of fact, the Greek government could be interested in postponing a possible deal in order to force the counterparty, reluctant to an eventual default, to agree on softer terms.

Nevertheless, the Troika does not stand unarmed: they know that Syriza cannot allow the country to leave the Eurozone. Therefore, although Grexit would undoubtedly be the worst outcome for both parties, they might still commit themselves to force Grexit in case of default, so as to win this “game of chicken”. A risky, but rewarding tactic, arguably backed by German taxpayers. We believe that this is the key of the game: the Troika may be willing to call into question the Greek membership in the Eurozone in order to persuade the Greek government to comply with the 2010’s bailout conditions.

There is a but, though. According to latest rumours, it seems the Greek government is building up a smart exit strategy. Tsipras’ official visit to the Kremlin, coming just a day before Greece must repay a loan of €458 million to the International Monetary Fund, arises suspects. Probably the Prime Minister is seeking support from EU-sanctioned Russia, putting itself against western sanctions on the country. This approach weakens the possible “fear strategy” the Troika may employ.

How are the negotiations going to develop? What comes next depends mainly on political interactions. The financial and economic world is just the backdrop of this mastermind fight; quoting Frank Underwood from House of Cards, “Money is the McMansion in Sarasota that starts falling apart after 10 years. Power is the old stone building that stands for centuries.” The final outcome could be an historical turning point in the European Union dream, which is threatened at its very foundations. Grexit would undermine stability in the EU affecting not only private and public investors, but also weakening the political and ideological union reached in the past years. In light of this, it looks clear that to understand the logics at the bottom of the negotiations it is necessary to adopt a different perspective from the investors’.

In conclusion, although we are witnessing a negotiation stalemate at the moment, we believe that with such high stakes in play, after playing all their cards, the counterparties are going to reach an agreement on the May 11th meeting of the Eurogroup.

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