Another attempt to find a solution to the future of Greece failed miserably, and disagreements remain high. The general market reaction is likely to remain short-lived, which would illustrate the limits of the Greek negotiation power. A failure to reach an agreement in the coming weeks could easily trigger bank runs, ECB liquidity withdrawal, and even a Grexit. The stakes are thus high.
Eurogroup talks on Greece collapsed again yesterday without an agreement. The Greek Finance Minister Varoufakis called the options Greece was presented as absurd and unacceptable. He argued Greece was not bluffing, it had not plan B. At the same time, he said he was ready to do whatever it takes to reach an agreement, and meet the other side halfway during the next couple of days.
The two sides very far a part
Greece was offered a six-month extension to its current programme to facilitate more detailed discussions. Greece had so far vehemently excluded a programme extension, but Mr Varoufakis appeared somewhat more open to such a possibility yesterday, though not on the terms offered.
The draft statement, rejected by the Greeks, said the Greek authorities commit to implementing long overdue reforms to tackle corruption and tax evasion and improving the efficiency of the public administration. At the same time, the Greek authorities reiterated their unequivocal commitment to honour their financial obligations towards all their creditors. The Greek authorities gave their firm commitment to refrain from unilateral action and will work in close agreement with its European and international partners, especially in the field of tax policy, privatisation, labour market reforms, financial sector, and pensions. The Greek authorities committed to ensure appropriate primary fiscal surpluses and financing in order to guarantee debt sustainability in line with the targets agreed in the November 2012 Eurogroup statement.
In other words, the Eurogroup expects Greece to continue its debt services, commit to bring its debt-to-GDP ratio much lower, not reverse previous reforms and implement more reforms as outlined in the programme. Contrasting this to the messages coming from Athens, the two sides are miles apart.
Few alternatives left
The Eurogroup head Dijsselbloem said Greece really had no other alternatives than to ask for an extension or apply for an entirely new programme, if the current want was allowed to expire at the end of the month. He said Greece had until the end of the week to ask for an extension, otherwise the time was up.
Yesterday’s negotiations further illustrated that the willingness for the Eurogroup to meet the Greeks halfway is not really there, even though there is probably some flexibility about the terms. It thus remains the Greeks that need to take the bigger leap in order to reach an agreement.
The idea of Greece getting funding from Russia or China has been raised as well, but does not look like a likely source. After all, even if there was willingness in these countries to offer the help, it would not come without conditions. In such a case, it would be hard to see Greece remaining in the Euro area and living up to the EU rules and values. More likely the Greeks could try to use such a possibility as a bargaining chip in the negotiations.
Real deadline set by the Greek depositors and the ECB
Despite the Eurogroup talking about this week’s deadline, it is the ECB that could set a fixed deadline for the negotiations by threatening to withdraw Emergency Liquidity Assistance (ELA) to the Greek banks. The central bank will review its policy on the matter tomorrow.
Another important issue, also affecting the ECB’s decision on ELA, is the confidence of the Greek depositors. Real Grexit fears would trigger faster deposit withdrawals, which would probably need to be tackled with withdrawal limitations and capital controls, and at that point the time to reach an agreement was running out.
Greeks hoping for a big market setback?
One can argue that the strength of the market reaction to yesterday’s setback will help determine the true negotiation power of the Greeks. No doubt the Greek markets will collapse again today, but it is the broader market reaction that will be more interesting. A huge bout of risk aversion and government bond volatility would probably raise worries among Euro-area decision-makers about the consequences of Grexit, thus raising their willingness to compromise. After all, the Greeks have tried to threaten that a Grexit would lead to the collapse of the entire monetary union.
However, such moves are unlikely to be realized, as the Euro area is much better insulated from Greek spill-over effects this time compared to a couple of years ago, not least because of the stance of the ECB, while hopes of an agreement are still alive.
The euro has weakened to some extent overnight, but the moves have been rather limited. At most then, yesterday’s failure will probably only cause rather short-term volatility in financial markets for now, while in Greece the moves should be larger. Still, until the Greek issue has been resolved, there will be some extra nervousness in financial markets.
As a result then, market pressure is more likely to push the Greeks to an agreement than the other side to a bigger compromise.
What if nobody is bluffing?
A softer stance by the Greeks remains likely to lead to an agreement, but the deadlocked situation has brought Grexit one step closer. There is a risk that the Greeks are not bluffing, and will hold onto their demands until the end, which could trigger bank runs and the removal of ELA, likely leading to a Grexit.
That remains a risk scenario, but one that should not be forgotten. In that case, also the broader market reaction would be much larger, though the future of the Euro area should still not be at stake this time, as the contagion channels are very different this time around.
Nordea