Crashed
Page 63
If no help could be expected from Washington, what about China, the new power in the global economy? Beijing saw the Eastern Mediterranean as a natural extension of its Eurasian One Belt, One Road logistical network. China had already taken a high-profile and controversial stake in Piraeus port.43 Varoufakis eagerly explored the possibility of attracting additional Chinese capital and even Chinese intervention in the market for Greek Treasury debt. Beijing seemed interested. But the bond buying Beijing promised never materialized. When Varoufakis inquired why, the answer he received from Beijing was stark. Beijing had pulled back because Berlin had let the Chinese know that it did not welcome their intervention in the Greek crisis.44
China and America as partners appealed to those Greeks like Varoufakis who thought of themselves as “modernizers” and did not have deep roots in the Greek Communist milieu. For the Old Guard of Syriza, Russia was the obvious option.45 In 2015 Merkel and Hollande were still struggling to contain the Ukraine crisis. Putin was making increasingly interventionist moves in Syria. Could Greece exploit its strategic location in the Eastern Mediterranean to gain leverage? On April 8 Tsipras traveled to Moscow to meet with Putin. But in the Kremlin he heard the same thing that the Greeks were hearing from Washington and Beijing. Putin’s message was simple: “You must strike a deal with the Germans.”46
But who in Germany was Greece to deal with? The authority in financial policy was held by Finance Minister Schäuble, but, as he made increasingly clear, he did not believe that Greece had a future in the euro area.47 Did Merkel share the same view? She was a more pragmatic politician than Schäuble; surely she would not want to see the breakup of the euro. Tsipras thought he could prevail upon her through personal diplomacy. Varoufakis, on the other hand, thought that what Merkel needed to understand was the threat that Greece could pose to Draghi’s stabilization efforts. Merkel exploited the gap between them. Seeking to split the Greek prime minister from his more left-wing cabinet members, she favored him with a series of personal meetings that convinced Tsipras that she would eventually deliver a compromise. The question was when and on what terms. The longer Merkel waited, the more desperate Greece became.
In April, amid talk of Greek default, the yield on the few outstanding Greek bonds still traded on open markets soared to 26.2 percent.48 Back in 2012 this might have triggered anxiety in Rome, Madrid and Lisbon. But now there was no contagion. The ECB was unfazed. As Draghi remarked: “We have enough instruments at this point in time...which although they have been designed for other purposes would certainly be used at a crisis time if needed. . . . We are better equipped than we were in 2012, 2011 and 2010.”49 With the ECB’s bond purchasing not only soaking up all newly issued government debt in the eurozone but reducing the total stock of sovereign debt available for private investors by 265 billion euros, there was little reason to fear bond vigilantes. The deliberate default on the ECB’s bond holdings planned by Varoufakis was supposed to puncture this complacency. But, as was becoming clear, Tsipras shrank from using the threat.
If no compromise could be reached and if Tsipras was unwilling to use Greece’s only real weapon, was there any way out of the impasse? For the creditors, it would have been easiest if Tsipras and his eccentric crew simply disappeared from the scene. But so soon after their handsome electoral victory that was too much to hope for. The EU was haunted by the ghosts of 2011. As the Financial Times noted, Brussels was “sensitive to accusations” that “the EU was complicit in ending the tenure of George Papandreou, Greece’s prime minister . . . and Silvio Berlusconi.”50 But the Eurogroup made no secret of the fact that they wanted Tsipras to ditch Varoufakis and the left wing of his party.51 Historical precedents were readily to hand. Europe had a track record of curbing radical left-wing governments. After a few “wild months” in the autumn of 1998, Germany’s Red-Green government under Gerhard Schroeder had jettisoned Oskar Lafontaine as finance minister.52 In 1983 Mitterrand’s turn to a hard currency policy had presaged the ouster of the Communists from his coalition government. Looking further back, the Financial Times helpfully suggested as a precedent “Britain’s 1931 National Government.”53 Would Tsipras be Greece’s Ramsay MacDonald? After another round of bullying by the Eurogroup at the Riga summit on April 25, with Merkel’s active encouragement, Tsipras moved Varoufakis aside. He remained as finance minister, but Euclid Tsakalotos, the minister for international economic relations, would be the lead debt negotiator. Another opportunity to deploy the Greek deterrent went begging.
Impact of ECB Bond Purchases, 2015
2015 Gross bond issuance
Redemption
2015 Net bond issuance
QE purchase for 2015
Net supply less QE
Germany
159
155
4
113
−109
France
187
118
69
89
-20
Italy
185
196
−11
77
-88
Spain
142
92
50
56
-6
Netherlands
48
37
12
25
−14
Belgium
33
21
11
16
-5
Austria
17
13
4
12
-8
Finland
10
5
5
8
-3
Ireland
14
2
11
7
4
Portugal
13
6
7
11
-4
Greece
7
7
0
13
-13
Total
814
651
162
427
-266
Source: Morgan Stanley Research, National Treasuries.
Was it suicide or assassination? When Athens refused to yield, European efforts to delegitimize the Syriza government in the eyes of its own population were overt. Jean-Claude Juncker and Slovak finance minister Peter Kažimír publicly declared that their disagreements were only with Mr. Tsipras’s government and not with the Greek people.58 Taking the hint, on June 18 a rally of pro-Euro anti-Syriza Greeks was called on Facebook. The riot police were pulled back; the government avoided any public confrontation with the pro-EU crowd. But Syriza’s confidence was rattled. The demonstration made clear that the Left were not the only ones who could mobilize extraparliamentary forces. After the demoralizing slog of Syriza’s first months in office, it was no longer obvious which side could count on more active popular support.59 In early June Tsipras and Tsakalotos once more sought a compromise. Athens would meet the creditors’ austerity target by a combination of increased retirement age and heavy increases in tax and social security contributions. For forty-eight hours this raised hopes of a deal. But there were sticking points. While agreeing to run a huge primary budget surplus, Syriza was still insisting on “political essentials,” weighting the adjustment less toward welfare cuts and more toward tax increases on wealthy Greeks. This satisfied the demand for social equity, but creditors insisted that it “could end up strangling the economy.”60 Furthermore, what Syriza wanted in return was a precommitment to debt restructuring. On that Germany would not budge.
Without access to the last tranche of the 2012 program, Athens was days away from defaulting. In a desperate bid to rally support, Tsipras sprang a new surprise.61 At one a.m. on the morning of June 27 he went on television to announce that he was calling a referendum. It would be up to the Greek people to decide either to accept or to reject the creditors’ memorandum. Tsipras, for his part, declared that he would campaign against acceptance, calling on the Greek population to reject the “blackmail ultimatum.”62 The Eurogroup was horrified. As Merkel made clear, with the Athens government campaigning against agreement there could be no further compromise.63 The following day, Sunday, June 28, the ECB pulled the trigger. It froze its emergency liquidity support for Greece’s banks at its current level. The next day this would unleash a disastrous bank run. The ECB could have gone further. It could have terminated emergency liquidity assistance altogether and demanded repayment. At the crisis meeting of the ECB’s board, there were certainly votes to be had for such a drastic course of action. But the ECB’s overwhelming power put Draghi in a delicate position.64 As a member of the troika and chief provider of financial life support to the Greek banking system, the ECB was “judge, jury and executioner.”65 Draghi did not want to appear as though he were further escalating the tension or “deliberately worsening Greece’s financial plight.”66 Capping Greek access to liquidity assistance was drastic enough. To avoid an immediate collapse, the Greek banks were preemptively closed, cash withdrawals were limited to 60 euros per day and capital controls limited capital flight. Middle-class depositors formed impatient queues to withdraw their cash. Greece’s privately owned media were in an uproar. The irresponsible radicals of Syriza, they told their audience, had taken the country over the edge.
With the creditors refusing either to negotiate or to make concessions until the results of the referendum were known, on June 30 Athens announced that it was delaying payment on money owed to the IMF. This was no mere administrative matter. The IMF is acknowledged as the super-senior creditor in international lending. Being in arrears to the IMF put Greece on a short list that included Sudan, Somalia, Zimbabwe, Afghanistan and Cambodia under the Khmer Rouge.67 And the size of its debts was unprecedented. Greece owed repayment on $26 billion to the IMF over the next ten years.
But at this crucial moment the IMF did not respond as one might have expected. In the summer of 2015, the dissatisfaction inside the Fund over the European approach to the Greek debt crisis finally broke into the open. Between a first blog post by its chief economist, Olivier Blanchard, in mid-June and the formal issuance of a paper on Greek debt sustainability in mid-July, the world’s leading financial authority declared the policy of extend-and-pretend practiced since 2010 both economically and politically unsustainable. Greece would have to make further tough decisions, no doubt, but the troika and the Eurogroup needed to stop pretending that that would be enough. Debt restructuring had to be on the table.68 With the backing of the US board members, overriding resistance from the European representatives, on July 2 the IMF published a preliminary report outlining the full absurdity of the programs so far. Instead of the 50 billion euros in privatization receipts scheduled in 2012, Greece had received 3.2 billion. The current program and all the variants haggled over since Syriza took office were unrealistic. No one who was serious would proceed on the basis that primary surpluses of 4 percent, massive structural changes and 2 percent GDP growth per annum were a realistic scenario.69 After what their country had been through since 2010, no political party in Greece could be expected to “own” such a drastic policy mix. Without ownership, one could not expect fulfillment. The IMF now called for at least 50 billion euros in debt relief, a doubling of repayment times and 36 billion euros in short-term financing to allow Greece to survive until 2018.70
It was a nasty surprise to the Europeans that the Americans would have let this happen. As late as early June, at the convivial G7 meeting in Bavaria, Obama had acted the part of a loyal ally. But it was a measure of the stability that Europe had now attained that the clash should have come out into the open. The only consideration that had justified the IMF’s involvement in the Greek bailout in May 2010 was the risk of systemic contagion. Thanks to Mario Draghi’s bond-buying, there was no longer any risk of that. The IMF could afford to voice principled opposition without fear of practical consequences. It would make no new commitments to the eurozone’s exercise in self-delusion. But it did not do the one thing that would have placed Berlin under serious pressure: It did not withdraw from the troika.
For the Greek population the choices were starker. Did they dare to challenge the creditors? Would a no vote mean the end of Greek membership in the euro or even the EU? Despite overt and massive intimidation, on July 5 a remarkable 61.31 percent voted against accepting the troika proposal. Given that the plan had by that point been repudiated as unsustainable by the IMF, the vote was not so much a wild act of political desperation as a brave and much-needed assertion of common sense. But the response from the creditor side was unyielding. Athens had until July 12 to come up with an even more austere and even less sustainable proposal or face expulsion from the eurozone. On July 9, with help from the French Treasury, the Syriza government cobbled toge
ther a new scheme, taking up a compromise on welfare cuts and tax increases proposed by the commission and coupling it to an appeal for modest debt write-offs and new credits of 53 billion euros. For the left wing of Syriza it was shameful surrender. Varoufakis, who resigned following the referendum, joined the internal party opposition. Meanwhile, Tsipras set off to Strasbourg in the hope of rallying support across Europe. On July 10 he made an appearance in the European Parliament, where he was greeted by a storm of approving whistles not only from the Left but also from the Far Right. Boos and catcalls came from the center.71 European politics were dividing between upholders of the status quo and a motley crew denouncing the eurozone as a German prison.