Ultimatums and Telegraphs

8 July 2015 | Philip Ammerman

Events in Greece and the Eurozone this week appear overwhelmingly negative, but there is a diminishing window of opportunity to strike a deal for Greece.

On Tuesday morning, 7 July, the European Central Bank kept Emergency Liquidity Assistance (ELA) limits stable to Greek banks following the Greek referendum, but increased the haircut on collateral to 45%. In order to access ELA, Greek banks need to post collateral. In this case, the banks have been using Greek government bonds as well as other instruments (including securitised loans to the private sector).

Speaking as an external observer, it is difficult to understand how most Greek banks can continue as going concerns following this decision. The Bank apparently considers this as a warning shot.

It is important to remember two points:

While ELA affects all Eurozone liquidity and is approved by the European Central Bank, it is actually extended by the national central banks of each Eurozone country individually. In other words, the real responsibility for ELA in case something goes wrong is the Central Bank of Greece and therefore the Greek taxpayer.
The European Stability and Monetary specifically forbids the European Central Bank from directly financing governments. While the ECB has side-stepped this with its SMT and its Asset Purchase Programme, the Bank has made it clear that it will only purchase government bonds below investment grade when the country is in a bail-out programme. This is the reason why the ECB is no longer purchasing Greek government bonds directly, but is accepting small-scale purchases via ELA extended to Greek banks. This second option is no longer tenable given the current situation in Greece, which is why ELA has been capped.

Tuesday, 7 July saw two crucial meetings in Brussels:

The Eurogroup meeting, comprising the Finance Ministers of the 19-member Eurozone, met at 13:00. Euclid Tsakalotos, an academician who is Greece’s new finance minister replacing Yanis Varoufakis, was introduced to his Eurozone colleagues. Dr. Tsakalotos was among those within SYRIZA who claimed that an agreement would be reached within 48 hours of a “No” vote, and that this would strengthen Greece’s position. So it was more than strange when apart from briefing his Eurozone counterparts on conditions in Greece, he did not offer any new proposals towards solving the crisis. He did, however, present the proposals Greece had made prior to June 28th, and requested a bridge loan. This was rejected. European finance ministers made it overwhelmingly clear that any new loan agreement must be comprehensive and well-founded. This irritated a number of Eurozone finance ministers, who had interrupted their schedules yet again to face an unprepared Greek delegation.
The Eurozone heads of state meeting, in which Prime Minister Alexis Tsirpas was read the riot act by other Eurozone leaders. The key decision made here was that Greece had until Friday morning to submit a comprehensive proposal for European Stability Mechanism funding. This would be based on a minimum 2-year programme, and would be based on loan conditionality which would have to be stricter than what was already offered, given the deteriorating financial situation.

Following these meetings, European Commission President Jean Claude Juncker and European Council President Donald Tusk made the following statements:

Greece has until Friday morning to get a preliminary, comprehensive plan in place.

Absent an acceptable plan, there will be a full meeting of the European Council (including all 28 EU Member States) on Sunday to decide Greece’s exit from the Eurozone.

A Grexit scenario has been worked out in detail.

There have been numerous press reports that indicate the level of dissatisfaction by the remaining 18 Eurozone governments with Greece. It is important not to pay so much attention to the external optics as to the decisions of the ECB this week, and at the end of the week, the European Council.

Taking these developments into account, we can conclude the following:

The ECB remains the primary source of survival for the Greek banking system. Further decisions are expected today and this week as to how the ECB will handle the situation. The ECB cannot unilaterally decide to end ELA, as this would mean the destruction of the Greek economy. Political cover from the European Council or Eurozone is required.
Negative quotations aside, the fact that the Eurozone has allowed Greece one final chance to submit a comprehensive proposal is positive. It is up to Greece (or SYRIZA-ANEL) to respond to this.
The fact that the initial Greek proposal was simply a re-hash of the pre-referendum proposals by SYRIZA is very negative. It shows that SYRIZA has not understood that the economic situation has deteriorated still further, and that the planning assumptions of its previous plan are no longer valid.
How the SYRIZA-ANEL government will sell the idea of higher austerity in Greece and a further loan agreement with “blackmailers” and “terrorists” at the moment when it has just completed a referendum on the issue is unknown. I assume that SYRIZA’s internal political calculations believe that New Democracy, PASOK and Potami will join it in voting for the measures. This is a very disingenuous approach to the people who voted “No” in this referendum, believing that austerity, ultimatums and blackmail had ended and dignity restored.

Judging from Alexi Tsipras’ rhetoric and his decisions so far this week, he seems like a man intent on having Greece leave the Eurozone.

Philip Ammerman