Squeezing out Greece

Greece wants to save Europe, but can it persuade Europeans?

by Pavlina R. Tcherneva, Al Jazeera

February 18, 2015 3:40PM ET

Greek voters last month rejected continuation of an austerity program that has plunged their economy into depression, voting in a government determined to break out of the current terms on which Greece gets help from the Troika.

On Monday, it looked as if the negotiations had reached an impasse. Euro members refused to provide Greece with a bridging loan, demanding adherence to the austerity bailout terms negotiated under the previous government.

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European officials, so far, have refused to budge. They are betting that Greece will seek to avoid a default at all costs to dodge a possible banking crisis, which could inflict more hardship on the population and undermine confidence in the new government.

Default on its debts is not an appealing option to Greece, although the consequences of such a move may not be as dire as some expect. Greece currently runs a primary surplus, and may well have enough cash on hand to pursue its stimulus reforms for a while. But at some point, the funding problem will re-emerge. Greece is hoping that improvements to the economy, including rapid growth in employment, incomes and profits that would bring more tax revenue and reduce anti-poverty spending would be sufficiently swift to produce rapid short-term growth, all of which would improve Athens’ ability to borrow from private markets for long-term public investment projects. The fundamental problem, however, remains a loss of monetary sovereignty.

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Fears of a banking crisis in Greece in the event of a default, though, may be overstated. Greek banks are all already regulated by the European Central Bank (ECB). Continuing the U.S. analogy, would the Fed shut down Citibank if the state of Georgia went rogue and refused to pay its debts?

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Germany may be determined to hold the eurozone together, but on terms that enforce the conservative economic orthodoxy first championed by President Ronald Reagan and Prime Minister Margaret Thatcher across Europe. If, indeed, all parties at the table seek to make the EU a political union, Varoufakis will be arguing that cannot be achieved on the basis of the Troika recipe, but requires broad embrace of more progressive pro-growth principles.

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Greece takes to the negotiating table a desire to stem the humanitarian crisis created by austerity, while avoiding the go-it-alone option of ditching the euro and reintroducing the drachma. But convincing the powers that be in the eurozone, and the vested interests behind them, of the need for a fundamental policy re-orientation toward a more progressive consensus remains a tall order.

Obama Administration Throws Greece Under the Bus; ECB Leak Recommends Capital Controls; Greece Weighing Capitulation (Updated: Germany Rejects Greek Proposal)

by Yves Smith, Naked Capitalism

February 19, 2015

As we’ve said from the outset, as much as we’d liked to see Greece prevail in its efforts to restructure its relationship with its creditors, not just for its own sake but for the benefit of other periphery countries and the Eurozone project, it was unlikely to prevail unless it could rally support. One possible source was the anti-austerity and anti-Eurozone parties in the rest of Europe. Perhaps we’ve missed it, but we’ve seen nary a sign of Marine Le Pen in France or Spain’s Podemos, the two proximate threats to business as usual in the Eurozone, using the extraordinary hostility of the Eurogroup to economically rational proposals from Greece as a talking point.

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And as we pointed out at the time, the Administration had legitimate reason to try to push the recalcitrant Germans and northern countries to relent. The Eurozone is on utterly unsustainable foundatoins. It isn’t just that its structure is defective, with monetary integration but no Federal fiscal structure to allow for Eurozone-wide government spending to help equilbrate economic performance across regions. It is also that the design of the Eurozone is far too skewed to Germany’s advantage. Germany continues to run large trade surpluses with the rest of the Eurozone; they’ve even widened to a record 7.4% of GDP. Germany wants the impossible, to run persistent trade surpluses with its trade partners, yet not finance their purchases.

Unlike the Eurocrats, the Administration, along with most financial analysts, knows that persisting in this course of action assures a Eurozone breakup. And unlike Germany and its allies in the Eurogroup, it believes that a Grexit would pave the way for other countries leaving, and that the consequences of a Eurozone implosion would be catastrophic for Europe and not too pretty for the US either. So the intervention was hardly selfless. And our sources tell us Treasury did expend some effort on Greece’s behalf, although given the lack of movement from the Eurogroup side over the last week, we doubted how forceful a case was made.

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The Greek government should have imposed capital controls by now but was loath to do so, since any leak of that line of thought would increase the deposit run. While it could be done in isolation, simply as a protective measure to prevent deposits being moved out of the country and to reduce daily withdrawals. it would be entirely logical to see it as a step on the way to a Grexit. Anyone with an operating brain cell would want to minimize their exposure to having cash in the bank turned into less valuable drachmas.

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The irony here is that if Greece were willing to default, Germany would have turned an intended subjugation of Syriza into a devastating political wound to the ruling German parties. Refusing to extend the ELA any further, if it were to come to that, merely limits ECB losses. If Greece were to default, it would suddenly expose the size of the commitments to Greece through the Target2 system, the vehicle used to launder the bailout money from Greece to French and German banks. Most Germans have the inaccurate picture than the rescue funds went to stereotypically lazy Greeks, when 91% of the payments actually went to banks.