This article was originally published on CapX by Zac Tate, Deputy Editor of CapX
It is getting desperate for the Greeks. A majority of global investors (52%) who responded to Bloomberg Markets Global Poll last week believe Greece will leave the eurozone, up from 31% as recently as mid-January. That Alexis Tsipras replaced the increasingly disputatious Yanis Varoufakis with the more tactful Euclid Tsakalotos appears to have had no effect.
In his 2012 interview with ABC in Australia, Tsakalotos said this:
“It’s all very well saying that it’s just the Greek people who have been profligate but there’s a crisis in Spain and in Portugal and in Italy, and part of the problem was the banks made an awful lot of money during those periods, and now that they’re not making money the rest of society is socialising their losses. Quite frankly, that isn’t capitalism, is it? It’s not a capitalist solution that every time the banks don’t make money and make losses, the rest of society pays for it.
“There is no reason why the eurozone should always be the eurozone of Merkel, why it should always be the eurozone of the banks, why it should always be the eurozone that restricts democracy, that doesn’t allow peoples to vote on alternative policies – which says more or less you can vote for anything you like as long as you vote for what Merkel and Schauble says is right.”
He’s spot on, but he is unlikely to get his way, not least because last week we discovered that the Spanish economy grew by 0.9% in the first quarter of 2015. Christian Schulz, an economist at the German Berenberg bank, was quick to compare the eurozone’s new poster boy with Greece:
“It shows that reforms work, it should help reduce unemployment much further and thus political fragility and it serves as a shining example to Greeks of what their country could have if its government finally returns to the path of virtue.
“Economic strength in the Eurozone can converge again, which raises the attractiveness of euro membership to potential new members.”
Schulz is of course right too. The creation of over 400,000 jobs in Spain last year is widely credited to the grand bargain made three years ago between Mariano Rajoy and the trade unions to increase flexibility for firms to set their own working conditions. Rajoy expects growth to come in at 2.9% this year, which could be higher than any of the G7 nations, and anticipates 2 million more jobs created by 2018.
The persistence of cultural Zuhandenheit - the readiness to propose solutions motivated by narrow interpretations of social and economic history: Nazi occupation in Greece, or hyperinflation and reunification in Germany – remains unhelpful and could still lead to an outcome which is unfavourable for all parties. The hope is that Tsakalotos can make progress where Varoufakis couldn’t, and offer a package that while violating Syriza’s call to ‘end austerity’ can be offered in a referendum to Greeks to put their support for continued membership of the euro to the test. If Tsipras is right in suggesting the parties are 70% of the way towards a final deal, there are grounds to be hopeful that the denouement will be positive.
Nevertheless, Jeroen Dijsselbloem, the president of the eurogroup, has admitted that a Plan B of contingency arrangements is being considered in the event of a Greek exit. While we shouldn’t forget that this has been said before, it wouldn’t be surprising if embittered eurocrats are now willing to sacrifice the principle of ‘ever-closer union’ for the practical expediencies of preventing another economic crisis.
A deal has to be made by July 20th to cover the $7bn in bond redemptions and interest payments due to the ECB, but Greece’s cash crisis may bring things to a head much sooner. In the four months up to March, bank deposits in Greece fell by €26bn (or 16%). The country has been able to staunch the outflows by indirect liquidity injections of €76.9bn from the Bank of Greece via the ECB, backed by low-grade collateral. The ECB has raised the ceiling for Emergency Liquidity Assistance by €2.9bn over the last two weeks, suggesting the slow run on Greek banks has not abated.
The ECB will meet this Wednesday to discuss its risk exposure to Greece and consider changes to the discount rate it applies to collateral it accepts from the Bank of Greece in exchange for liquidity. Tougher discounts effectively cap the amount of cash it can receive and expedite the bailout negotiations. One might detect a sinister motive behind any such move.
At a more fundamental level, the lack of cash is creating major friction in the real economy. Payments to civil servants and pensioners are also becoming increasingly difficult. In mid-April, the Greek deputy Finance Minister Dimitris Mardas said that the treasury was €400 million short and had requisitioned only €160 million in cash reserves from local authorities, hospitals, universities and municipalities. Requests from the Bank of Greece for the cash reserves of over 1,500 local government entities are expected to raise €2.5bn, liquidity for just six weeks according to an unnamed source, while the FT reports that only one regional governor of thirteen has complied.
We shouldn’t be fooled by Greece’s improved public finances, reflected in the surprise record surplus for the period January – March of €1.7 billion, against a target of €119 million. Silvia Merler at Bruegel points out that expenditure control has mainly been achieved by postponing payments to suppliers, while revenues have been boosted only by an inflow of EU infrastructure funds.
They say cash is king. The absence of it may finally start focusing minds to bring this exasperating crisis to some sort of conclusion. Whether that outcome works in the interests of all – electorates, debtors and creditors – and “raises the attractiveness of the euro membership” remains to be seen.
Zac Tate is Deputy Editor of CapX
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