At best, it's the end of the beginning
On Friday, Free Lunch called the eurogroup meeting on Greece "the next of many high noons", and so it will prove this week. Much like previous "breakdowns in talks" were nothing of the sort, Friday's "agreement" was not one either. The FT's Peter Spiegel gives a quick summary of what the eurogroup on Friday signed off on. This was to consider extending the rescue loan if, but only if, the institutions formerly known as the troika approved the reform proposals that Athens was scrambling to write down over the weekend. So the "deal" is to keep talking, and that as soon as today.
It is a good time to clear up some more of the misperceptions riddling the running commentary. First is the notion that what Syriza agreed to on Friday differed little from what was on the table "on the day the government took office", as the Wall Street Journal's Simon Nixon puts it. That's quite wrong. A blog by Norbert Häring lists the ways in which Athens got the eurogroup to sign off on a statement that preserves a lot of negotiating space to press for a bigger rejection of the "memorandum" policies Syriza was elected to end. That's in addition to some small but substantive movement on the strictness of the fiscal targets. (In a companion piece, he argues that the German side got nothing that Greek finance minister Yanis Varoufakis had not already offered on February 11.)
Second, the notion that this "deal" to extend the financing agreement keeps Greece within the euro for the next four months (or a few days, depending on how likely it is that Athens' reform proposals will be approved). If one thinks Greece needs the rescue funds in order to stay in the euro, note that even if the extension is agreed for real, no fresh money will arrive in time to pay off the €4bn in debt service falling due this month and next (Athens' principal debt redemptions are shown in the graph below). So if that were the Grexit trigger, we're just where we were before.
But, third, the lack of a rescue loan programme doesn't have to force Greece out of the euro. The common perception is that without an agreement, there will be a run on Greek banks, from which the European Central Bank will withhold liquidity, leaving Athens with no other option than capital controls. BreakingViews' Hugo Dixon "calculates" there is now a 34% chance of Grexit, by simply assuming that if capital controls are introduced, Greece will probably leave. But Cyprus has capital controls and last time Free Lunch looked, Cypriots were still transacting in euros. If anything, capital controls help a liquidity-starved country to stay within the single currency.
Moreover, it is gratuitous to think the ECB will not cut off the Greek banks. Frankfurt is clearly keeping them on a tight leash, but there is no technical limit on its ability to refinance Greek deposits in their entirety, nor indeed much good reason to refuse, if the central bank is assured Athens does not want to leave. At the height of the Irish crisis, central bank money amounted to about a year's worth of Irish GDP — the Greek banking system still gets less than one-half.
So even if the extension does not in the end materialise, the road to Grexit is long and tortuous. There are many alternative paths, including capital controls or continued liquidity provision. Another alternative is to restructure Greek banks, which would hand the problem to the new EU bail-in authorities and secure both the solvency and the liquidity access of the inheritor banks. Or, as Wolfgang Münchau and others have proposed, Athens could begin issuing transferable tax credits to relieve the funding squeeze. While Greece cannot make such "tax anticipation notes" legal tender beyond the payment of taxes (Münchau fails to recognise this), it would enable the government to economise on euros, leaving them for the upcoming IMF and ECB debt. It would also make bank restructuring easier by turning banks' existing deferred tax assets into sellable securities.
Finally, a misperception of a misperception, so to speak: the notion that austerity has failed in Greece. The German group of "economic sages" who advise the government have rebutted this "Anglo-Saxon" accusation. But their rebuttal fails, for reasons Simon Wren-Lewis convincingly sets out. In particular, the Germans' point that Athens had no alternative to reducing its 15%-of-GDP deficit when private financing dried up in 2010 does not mean the pace of reduction was not counterproductive in terms of debt sustainability - it turned an unavoidable recession into an avoidable collapse - nor that it was right to pay back outstanding debt in full instead of writing it down at the start. Anglo-Saxons and Greek leftists stand together on the right side of this one.
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