The ECB Ready to Put a Choke Chain on Syriza

While Greek Finance Minister Yanis Varoufakis appeared to be gaining ground in his quest to build support in his uphill battle to restructure Greece’s debts and its relationship with the Eurozone, unelected technocrats may be about to lower the boom.

In Paris, Varoufakis met with Finance Minister Michel Sapin, and headlines said France would “support” Greece. However, if you read the news stories, there is less here than meets the eye. “Support” simply means act as an intermediary with Greece’s, when Greece has already hired Lazard for that role. In addition, Sapin made clear that France did not back Greece on its most important demand, that of debt reduction, which he called “cancellation,” but would back a new timeframe and other changes in terms. Conventional wisdom in finance circles is that Greece will accept an extension of maturity, say from its current 30 years to 50 years, with a cut its back-ended interest payments, but that falls well short in terms of economic relief from what Syriza has asked for. Nor does it solve Greece’s real underlying problem, that of insufficient demand.

Press accounts typically described Varoufakis as striking a more conciliatory tone, but he did not back down from his statements on Friday, of being willing to deal with members of the Troika only separately and of not taking the February 28 bailout funds. Greece has apparently done a careful cash flow forecast and believes it can last until June, when it has principal payments on some of its debt coming due. Further details from the Financial Times:

The finance chief said Athens would make proposals within a month for a “new contract” with the eurozone, which would be in place by the end of May. “We are not going to ask for any loans during this period. It is perfectly possible to establish liquidity provisions with the ECB.”…

The bailout programme is due to expire on February 28. If it is not renewed, Greece will for the first time in five years be left without an EU financial backstop. Because the International Monetary Fund is unlikely to distribute funds without the EU’s participation, Athens could lack access to emergency funding to repay billions of euros in debt due in the coming months.

EU officials believe the country could eke out €4.3bn in payments owed to the IMF next month, but will run into a wall at the beginning of June when the first of two bonds worth more than €3bn must be paid. Without bailout funding, and an ongoing sell-off in the private bond markets, Athens would be forced to default.

Pushing out the negotiation timetable to June works for Varoufakis and Greece in two ways. First, it provides more time to try to get backing for the sort of major revamp of bailout provisions that he believes is necessary. Even June is an insanely tight time frame for something so novel and ambitious, but mere weeks is obviously unworkable. Second, the longer Greece is in the news standing toe to toe with various Eurozone power players, the more it will embolden anti-austerity parties, particularly in periphery countries. Spain has regional elections in April, and a strong showing by anti-austerity and/or anti-Eurozone parties, which would give Syriza some tailwinds.

However, there is a fatal flaw with this scheme. Greece depends on ECB support of its banks. And thanks to a bank run that started with Syriza’s win and intensified with Varoufakis’ bold statements last week, four of Greece’s five biggest banks have asked the Greek central bank for emergency support. That means the Greek central bank has to tap the ELA, the Emergency Liquidity Assistance. Any loans made from the ELA are subject to ECB approval.

As the New York Times describes, the ECB is to give its approval on Wednesday. However, many members of the ECB governing board, including most important Mario Draghi, are not at all happy with what they see as Greece’s intransigent behavior. As the cliche goes, one man’s terrorist is another man’s freedom fighter. The ECB has said it is considering imposing conditions on this extension of funds and also made remarks about Greece needing to come to an agreement.

Now if I can see from this side of the pond that a longer time period for negotiating a deal works in Greece’s favor, it is even more obvious in Brussels. It’s an obvious move for the ECB to use the ELA to bring them to heel by requiring that they do a deal pronto or lose access to the liquidity support. A short runway forces Greece to deal within the existing bailout framework rather than bust it open as Varoufakis planned. And an article in the New York Times by Landon Thomas suggests that that is the way things are moving:

In January 2013, as Cypriot banks faced collapse, Jens Weidmann, Germany’s powerful representative at the European Central Bank, made it clear how unhappy he was with the Cyprus bank bailout.

It was not the E.C.B.’s job to “fund the gap of any bank runs,” Mr. Weidmann told the central bank’s governing council….

On Wednesday, the E.C.B. will meet to decide whether it should approve a move by Greece’s central bank to provide emergency loans to some of the country’s largest banks…

On Saturday, one of the hard-line members of the E.C.B.’s governing council, the Finnish central banker Erkki Liikanen, said if Greece did not reach a deal with its creditors by the end of February, the central bank would stop financing Greek lenders.

It was Liikanen who was responsible for the original February 28 date for the expiration of the bailout funds. Cooler heads wanted an additional four months for the new government to settle in, which would also have had it more or less coincide the need to refinance maturing debt.

Despite the blocking role that Liikanen played before, his opposition might not be fatal. But ECB chief Mario Draghi appears to be on the same page. Again from the New York Times:

Recently, Mr. Draghi has appeared to have secured victory at Mr. Weidmann’s expense with his plan for the European Central Bank to buy a huge amount of the bonds of eurozone governments (otherwise known as quantitative easing). He may not be willing to pick another fight with the recalcitrant German over a second rescue of Greek banks.

“There is a danger that the E.C.B. will not allow the funding,” Mr. [Gikas] Hardouvelis warned, while acknowledging what an extreme step this would be. “It’s politics. Mr. Draghi is being pushed by Germany on Q.E., so cutting funding for Greece is a way for him to gain points with Germany.”….

In such a situation Mr. Draghi will have to confront the thorny question posed by Mr. Weidmann: Is it really the E.C.B.’s responsibility to keep Greek banks — or any of the eurozone banks — afloat in the face of a defiantly noncooperative government?

Hardouvelis, as the outgoing Greek finance minister, is clearly not an unbiased source, and also clearly had significant influence on the tone of this article. And as much as the Germans and Finns are up in arms about Syriza’s opening gambit, it would take a 2/3 majority of the ECB governing board to put a time limit on the funds to Greece.

On the one hand, quite a lot of the official commentary in the news is posturing. Our understanding is that a lot of pressure is being applied behind the scenes on Germany. But so far there has been absolutely no change in Merkel’s and Schauble’s stance. And there are signs that other European technocrats who might be able to exercise a moderating influence on the ECB, are also worried that Greece is overplaying its hand. Even Michel Sapin, the French finance minister, reportedly stated that Greece needs to come forward with its proposals “calmly and quickly.” From the Financial Times:

His [Varoufakis’]comments on Sunday underscored the fears of eurozone officials that the Greek government was unaware of the precariousness of its financial situation.

“Everybody [in the eurozone] wants a deal,” said one senior eurozone official. “But through their actions and their rhetoric, the new government is making a lot of people upset. They are putting themselves in an impossible situation.”…

Despite a more emollient tone from Alexis Tsipras, Greece’s radical leftwing prime minister, over the weekend, EU officials have been dismayed by Athens’ repeated rejection of a bailout extension — and refusal to co-operate with the troika of international creditors. German officials were also irritated at its refusal to engage with Berlin, although Mr Varoufakis said he had now been invited to the German capital.

And the last paragraph of the story is ominous:

ECB president Mario Draghi has told colleagues he is planning to drive a hard bargain on bank liquidity — a similar strategy used with Cyprus in March 2013, which forced Nicosia to accept onerous bailout terms. But Mr Draghi is also wary of unelected central bankers taking a decision that would force Greece from the euro.

So Wednesday is a critically important day. If the ECB does not put a time limit on the bailout funds, or has the backstop go until June, when Greece needs a deal regardless, it means that Syriza’s high stakes strategy is still alive. But the ECB may move decisively, turing the promise of a new deal for Greece and democracies finally taking the reins back from financiers into a false dawn.