Greece's maverick finance minister Yanis Varoufakis remains adamant a deal with creditors will be struck on the country’s finances today despite farcical negotiations last week ending without even an agreement on a joint statement.
“Our resolute stance on totally logical matters will, in the final analysis, lead to a mutually beneficial convergence, even at the 11th hour,” Varoufakis said yesterday.
Time is against Varoufakis, who faces a series of highly significant deadlines. The first could be as soon as Wednesday when the European Central Bank (ECB) votes on whether to maintain emergency lending (ELA) provided to Greek banks.
The ECB’s lending to any bank depends on the recipient being solvent – owning assets worth more than its liabilities. But a big chunk of Greek banks’ assets consists of Greek government bonds. Should Varoufakis fail to secure a deal by then, the ECB may deem Greek debt worthless and Greek banks will be deemed insolvent.
Aside from the ECB, Greece must also negotiate with the European Commission (EC) and the International Monetary Fund (IMF).
“If Greece rejects the proposal by the institutions (EC, ECB, IMF) today, this would likely precipitate a decision by the Governing Council not to extend ELA – a two-thirds majority is required – which would require the imposition of capital controls to stop deposit outflows and capital flight out of Greece,” said economist Thomas Harjes from Barclays. With Greek government ministers warning they could run out of money in March, one urgent request from Greece is €5bn in bridging finance to keep the state afloat until a new deal is struck during the summer.
Yet they will likely need more than this, as the government faces around €12bn in debt repayments by the end of June. But to allow Greece to increase its debt may require the unlikely extension of ELA. “If this is not done, then Greek banks (the only real buyers of this debt) are unlikely to have enough liquidity to purchase the new issuance,” said Raoul Ruparel, head of economic research at think tank Open Europe.
Negotiations are likely to be tense after failure to reach an agreement last week. Varoufakis said the two sides had agreed on many issues but privatisations and labour issues remained sticking points.
Privatisations were part of Greece’s bailout plan that, if it had stuck to, would have granted the country a further €7.2bn at the end of February.
Debt write-offs have been ruled out, but one of Greece’s key negotiating points will be on its primary surplus. The primary surplus is the amount of state revenue minus expenditure but excludes interest on debt. Greece has a primary surplus target of three per cent of GDP this year, which Varoufakis wants taken down to 1.5 per cent.
Varoufakis is renowned as a top game theorist, but in game theory the incentives of the players are normally defined beforehand. Gauging the incentives of EU politicians will prove challenging.
“EU politicians are concerned about the systemic financial consequences of Grexit and the damage it would cause to their European project, but forcing a crisis on Syriza-led Greece might serve their own domestic interests if it curbs a wider populist backlash,” said economist Dario Perkins from Lombard Street Research.
Some fear that granting Greece too many concessions will lead to greater support for populist parties such as Podemos in Spain, which has rapidly gained in popularity in recent times.