Viewpoint: The Eurogroup’s negotiation strategy with regards to Greece has become markedly intransigent

As Greece has no viable alternative, the price to be paid will be mostly political….. …..

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Improved access to the market for Italy and Spain induced the Eurogroup to adopt a more intransigent stance in talks with Greece. The stiffening of the negotiation strategy, explicitly called for by Germany, Holland, and Finland, was also prompted by the decision taken by Greece’s main political parties to schedule an early general election in April, when the second economic consolidation plan is also due to kick off. Last Wednesday’s Eurogroup meeting was called off, an replaced with a conference call, and Greece has had to submit letters committing to implement the plan, signed by the leaders of the two main political parties, and defining coverage of the 325M shortfall, as requested by official creditors. The budget correction bill should be brought before Parliament today or tomorrow, and be voted on Sunday. The main bill had already been approved by Parliament with a wide majority of votes on Sunday, 12 February.

It will then rest on the Eurogroup, due to meet on 20 February, to decide what action to take. A lack of confidence in Greece may result in the adoption of assistance mechanisms that allow the country very limited operating independence. According to the FT, the new plan could include an escrow account with the priority function of covering debt reaching maturity over the following 9-12 months; any shortfalls would be covered by reducing the funds destined to covering the deficit resulting from the functioning of the public administration, forcing the Greek government to intervene immediately with its own corrective measures. The stable presence of an observer on behalf of official creditors could also apparently be imposed. A problem still awaiting a solution would be that of the financial gap to be closed in order to achieve a 120% debt/GDP ratio in 2020, estimated by some sources at 6 billion euros, without reviewing the total amount of the programme, announce at 130 billion euros. A swap involving Greek bonds held by the Eurosystem as a consequence of the SMP seems to be under way: the action will allow the ECB to escape the consequences of retroactive CACs being imposed on bondholders, but may also allow a faster reduction in the level of public debt in the future, if the ECB is willing to forgo the profits that will result in case of full repayment.

The whole issue is compromising relations between Greece and several creditor countries, creating tensions within the European Union. At present, however, Greece seems to have no bargaining power at all to question the conditions imposed. The crucial point is that the possible threat of the country not acknowledging its debts is not credible. While it is true that official creditors are already exposed by 73 billion euros, on top of the bonds held by the Eurosystem, it is also true that the protection mechanisms are still imperfect and, despite the greater willingness of investors to make distinctions among countries, the existing mechanisms cannot entirely rule out contagion risks. However, the balance of costs and benefits for Greece would be simply disastrous in the event of a default and a return to full monetary sovereignty. Greece’s exports are worth half its imports, and lacking substantial, regular inflows of foreign capitals, it would find it impossible to guarantee payments in foreign currencies (including, at that point, also the euro). As Greek economic agents would probably not have access to the capital markets, initially the rebalancing would take place mostly through a crash in imports: the consequences on economic activity would therefore be much more severe than those of the austerity plan required by the economic consolidation programme.


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