The SYRIZA Somersault

23 March 2015 | Philip Ammerman

A brief review of changes to SYRIZA's policy objectives in its first two months of power

Nearly two months ago, on the evening of January 25th, SYRIZA won 36.34% of the Greek popular vote and was called upon to form a government. This it did the next day, in an unexpected election coalition with Independent Greeks. This coalition is unusual in that it represents a far-left and far-right government coalition.

That same week, a number of Greek ministers and the Greek Prime Minister made several key promises, building on what had been promised in the pre-election campaign:

“The Memorandum” is finished. Austerity is over. In other words, the loan conditionality was eliminated, and social spending would begin again.
The “Troika” would never set foot in Athens again. In other words, the technical teams monitoring the loan agreement would not longer implement technical reviews.
That Greece would not borrow money to pay off loans, and would not seek the outstanding € 7 billion from the second bailout package. In other words, that loan refinancing would no longer be used to pay off expiring debt (a standard practice in the public and private sectors all over the world).
That Greece had sufficient funds to maintain government operations, and that a “frugal living” (λιτός βίος) would get the country through.

It took just over one week for Minister of Finance Varoufakis to admit to an audience of bankers in London that a key SYRIZA pre-election platform—the write-off of 50% of Greek public debt—would not take place.

It took just over two weeks to admit that the Greek privatisation programme would continue.

It took until February 18th to announce the total capitulation of SYRIZA’s unrealistic promises in Minister of Finance Yianis Varoufakis’ letter:

In this context, the Greek authorities are now applying for the extension of the Master Financial Assistance Facility Agreement for a period of six months from its termination during which period we shall proceed jointly, and making best use of given flexibility in the current arrangement, toward its successful conclusion and review on the basis of the proposals of, on the one hand, the Greek government and, on the other, the institutions.

In other words, not only would the “Memorandum” continue, albeit under its technical name (Master Financial Assistance Facility Agreement) and would be expanded by a requested 6 months, but that the Troika inspectors would continue their work (rebranded as the representatives of “the Institutions”). Attempts to brand this as a "bridge programme" for domestic consumption in Greece failed.

This letter was accepted with revisions on February 20th meeting of Eurozone Finance Ministers (the Eurogroup). This was prefaced by MinFin Varoufakis' comments that SYRIZA accepted "70% of the previous reforms." With this, the Eurogroup requested a detailed list of reforms that SYRIZA would implement.

The first set of seven suggested reforms was not comprehensive enough. At the same time:

Greece’s promise not to undertake unilateral actions was [theoretically] broken in several points passed in the “humanitarian law”;
Greece began a game of hide-and-seek with the Troika representatives, insisting on meeting them in Brussels or in hotel meetings around Athens, in order to avoid the impression that inspection visits were taking place;
Various Greek ministers and the prime minister made incendiary statements in Parliament or to media, calling into doubt their commitment to the agreement they themselves had signed. These included, among other, pressing Germany for € 341 billion in World War II reparations or threatening to seize German assets such as the Goethe Institute in Athens. It also included vilifying Spain and Portugal as having formed an “Axis” against Greece.
Yianis Varoufakis threatened a referendum if the Eurozone rejected his debt plans. This threat too was rescinded.
Greece’s negotiating tactics earned it the reproach of every other country in the Eurogroup, including traditionally close ally Cyprus.

During this time, three tangible signs of progress were made:

The European Central Bank approved new limits to Emergency Liquidity Assistance for Greek banks in three weekly raises: € 600 million; € 500 million and € 400 million;
The Greek government was able to collect € 600 million in Hellenic Financial Stability Fund profits.
The European Commission pledged € 2 billion to address the “humanitarian crisis” in Greece. How and when this would be done remains unclear.

None of these factors, however, had anything to do with the "real" Greek economy.

It is also noteworthy that in March, the Greek government managed to meet all Treasury bill redemptions and the IMF debt payments. Part of these were possible thanks to the HFSF profit and the ECB ELA; part was possible thanks to cash pooling from Greek public sector institutions.

In the last week, the following events have occurred:

Prime Minister Tsipras met with a group of European prime ministers, ECB President Mario Draghi and Eurogroup head Jeroen Dijsselbloem, to seek some form of political resolution. This was rapidly rejected.
This meeting was preceded by another letter from the Prime Minister to his European counterparts, which was leaked today by the Financial Times. In this letter, the Greek Prime Minister requests a lifting of the ECB waiver on purchases of Greek Government Bonds. Prime Minister Tsipras concludes his letter with the following apparently delusional statement: In conclusion, Greece is committed to fulfilling its obligations in good faith and close cooperation with its partners. It's hard to understand by which measure the Greek government is behaving in good faith or close cooperation.
Minister of Finance Yianis Varoufakis, proponent of “lean living”, was photographed in a lavish spread by Paris Match, and was reported by the Daily Mail of renting his Aegina vacation house for € 2,000 - 5,000 per week. Late last week he was also involved in “Fingergate”.

My conclusions to this mess are unfortunately those signalled in my post of 21 January:

SYRIZA does not have a qualified plan that addresses Greece’s pressing economic and social difficulties within its European treaty and bilateral obligations. Its “Thessaloniki programme” is in tatters, and was unworkable for the reasons stated: social spending is front-loaded; tax collection takes time and are back-loaded.
SYRIZA’s demand to write off 50% of debt lasted from election night on January 25th until February 2nd. The SYRIZA “somersault” starts on this date.
Additional financial aid from Europe is not forthcoming. I was surprised that the ECB allowed the recent ELA increases of EUR 1.5 billion, and not at all surprised when the ECB lifted its waiver on the purchases of Greek government bonds on February 4th. This is not only the case because Greek bonds are “junk”, but because the Greek government is the only one that was actively seeking to write off its sovereign debt in a unilateral action.
Capital flight has increased. Foreign and domestic investments have been cancelled. Tax collection has slumped.
Despite its vaunted competence in game theory and social market economics, SYRIZA has comprehensively failed to present a plan to manage the Greek economy. It first signaled that it would comply with reform commitments, but since then has failed to take any kind of ownership, or to present a budgeted, integrated alternative to the initial reform programme. Moreover, it has shown itself entirely unable or unwilling to even understand what this means in practice.
SYRIZA has effectively cancelled all privatisations, and has recently called for the cancellation of several key infrastructure contracts.

With the latest abject letter, it remains to be seen whether Greece will finally present a list of reforms which make any kind of economic sense, from any ideological viewpoint whatsoever. By economic sense, I mean ones with a budget attached where the sums balance.

The sight of Greek insisting it needed no new loans, insulting its creditors, and then demanding additional loans is deeply unedifying and entirely contradictory. Having stared at the face of the abyss, Prime Minister Tsipras finds that he cannot default as easily as he thought while he was in opposition, nor can he force the European partners to accept a unilateral write-down, nor can he force them to extend new credit via the ECB.

Besides the damage this does to Greece, it does significant damage to SYRIZA's domestic policy agenda, which does include some positive measures and deserves an objective hearing. Unfortunately, this agenda has so far been characterised by the same incoherence and lack of prioritisation that its international negotiations have.

In contrast to 2010 and 2012, the Eurozone no longer fears a Greek internal default. Ireland exited the bailout early and has just raised money at negative interest rates. Portugal has exited its bailout, using low interest rates to refinance IMF loans. Spain shows fragile GDP growth.

While European leaders have stated that they want Greece in the Eurozone, they have reached the limit of their political capacity to indulge SYRIZA’s contradictory and irrational demands. Whether SYRIZA can pull back from the brink and develop a sensible economic reform programme, even at the last minute, remains to be seen. Public funds are now entirely depleted, and its remains to be seen if government operations can be financed through April without additional external loans.

Absent a break-through by European institutions, I believe that an internal default, or payment delay, will occur in the next 10 days. This default will be signaled by late salaries, pensions or other payments. This may be averted if:

The European central banks agree to remit € 1.9 billion in ECB profits (this measure was rejected by the Spanish Prime Minister last week).
The ELA limit is lifted, allowing Greek banks to buy additional T-bills (both options were rejected by the ECB on Thursday evening / Friday morning).
The “100-instalment” tax plan raises sufficient capital to keep things ticking over (at least for a limited time). This third option may be the most realistic.
Additional bank deposits in Greece are frozen pending a tax audit, and then seized (either via direct sequester or via a “settlement” and used to finance government operations).
China or Russia purchase Greek government bonds. I consider this highly unlikely, at least to the degree needed to make a meaningful difference. (China has made small purchases of T-bills). Any Chinese or Russian move in this direction will have to be accompanied by the sale of strategic assets to Chinese and Russian companies. Greek efforts in this direction have already been delayed (Cosco / Port of Pireaus / Multimodal transport centre) or cancelled (Russian Railroad interest in the Greek railroads, or the natural gas network).

In any case, I continue to believe that the EU leaders want Greece to remain within the Eurozone, and that a default, if it does occur, will occur with Greece still using the Euro. Given the abysmal quality of public governance seen over the past two months, such an event may now be inevitable.

Philip Ammerman