Greek Economy

Will the ECB Continue Its “Sherman’s March to the Sea” with the Greek Economy?

by  Yves Smith  

After the momentous “No” vote in support of the Greek ruling coalition Greece’s lenders and most important, the Eurozone leaders of the countries that have made 60% of Greece’s outstanding loans, are officially still figuring out what to do. Merkel is going to Paris to confer with Hollande today. The Eurogroup has set a meeting for tomorrow at 1:00 PM

However, despite the responses of media outlets and many pundits that the Eurocrats will have to beeat a retreat and offer Greece concessions, it’s not clear that this event strengthens the Greek government’s hand with its counterparties. Remember, Tsipras enjoyed popularity ratings of as high as 80% and has always retained majority support in polls. And it’s all too easy to forget that “the creditors” are not Merkel, Hollande, Lagarde and Draghi. The biggest group of “creditors” are taxpayers of the 18 other countries of the Eurozone. The ugly design of the Eurozone means that the sort of relief that Greece wants most, a reduction in the face amount of its debt (as opposed to the sort of reduction they’ve gotten, which is in economic value, via reductions in interest rates and extensions of maturities) puts the interest of those voters directly at odds with those in Greece.

Our understanding is that a reduction in principal amount, under the perverse budgetary and accounting rules of the Eurozone, would result in those losses showing up as losses for budget purposes, now. They would need to be funded by increased taxes. Thus a reduction in austerity for Greece, via a debt writeoff, simply transfers austerity from Greece to other countries. It’s not hard to see why they won’t go for that. And Eurozone rules require unanimous decisions.

Even though the ruling coalition had said it wanted to restart negotiations immediately upon getting a “no” vote, the lenders have asked Greece to send a new proposal, apparently deeming the one it submitted on June 30 to be out of date. It’s doubtful anything will happen before the Eurogroup meeting tomorrow.

The remarks from European leaders have been mixed. Eurogroup chief Jeroen Dijsselbloem made it clear he was Not Happy:

I take note of the outcome of the Greek referendum. This result is very regrettable for the future of Greece.

For recovery of the Greek economy, difficult measures and reforms are inevitable. We will now wait for the initiatives of the Greek authorities. The Eurogroup will discuss the state of play on Tuesday 7 July.

German MPs, who would need to approve any new bailout package for Greece, were also not sounding very accommodating. The first official remark from Berlin was hostile From the Financial Times:

But there was a scathing response from Berlin, which has refused to contemplate debt relief until Greece commits to and implements reforms. Sigmar Gabriel, deputy German chancellor, said Mr Tsipras had “torn down the last bridges on which Greece and Europe could have moved towards a compromise”.

“With the rejection of the rules of the eurozone … negotiations about a programme worth billions are barely conceivable,” he told Tagesspiegel newspaper.

A seemingly more considered response was not much better. From Bloomberg:

Ingrid Arndt-Brauer, who chairs the finance committee in Germany’s lower house, said that she had expected the committee to be summoned Tuesday to begin the process of helping Greece with a new bailout package. The “No” vote rules out any such move.

“Nobody wanted to torture the Greeks — we’re not terrorists — but to help them,” said Arndt-Brauer, a lawmaker with Merkel’s Social Democratic coalition partner. “A ‘Yes’ vote would have signaled a readiness to cooperate — some reforms at least for fresh help. I see no credible basis to help Greece right now, none at all.”

This morning, some hardliners are making more conciliatory noises. For instance:

Spain’s economy minister Luis de Guindos has echoed that Greece should remain part of the eurozone and the euro is irreversible.

He said the Spanish government was open to negotiating a third bailout, and any new Greek package should include a comprehensive analysis of Greek needs.

More important, the Telegraph reports that Hollande has said he will “bend over backwards to keep Greece in the euro.”

However, the key party to watch to see whether the lenders are prepared to soften their stance much is the ECB. The central bank is to decide today whether to increase the ELA, which is a necessary step for the punishing bank holiday to come to an end. The ECB has decided to wait till later in the week to decide whether to really lower the boom and increase collateral haircuts, no doubt waiting for a reading from the Eurozone politicians. Yanis Varoufakis had promised Greek banks would open no matter what on Tuesday. It’s hard to see how they could given that even cash itself is running scarce. Banks do have “vault cash” on their premises, but that’s not meant to stand up to large-scale withdrawals.

As Wolfgang Munchau pointed out in the Financial Times, one way the vested interests overplayed their hand was by talking up scarcity and shortages before many people were experiencing them. But suppliers and distributors of food and pharmaceuticals are sounding desperate, and desperation does not mean just lost revenues and upset customers. As the experience in Cyprus showed, a mere 12 day bank holiday started breaking supply chains. It’s not hard to imagine, given the sustained depression in Greece, that businesses are even more fragile, so that business closure and failures will start occurring more rapidly than in Cyprus. While some might be reversible when the money spigot is turned back on, most are likely to be permanent. And that means loss of jobs, and even greater difficulty keeping commerce and important resourcing going.

As we discussed in our posts yesterday, a bank holiday is also a huge turn-off to tourists. Few are brave enough to come when access to medicines, food, or even cash at ATMs is in doubt. And this bank holiday falls at the worst possible time, in the midst of tourist season, in an economy that gets roughly 18% of its GDP from tourism.

Let us also not kid ourselves: it would be highly unlikely that the ECB would keep the ELA limits in place without having conferred with the Fed.

If the central bank continues to play the enforcer role, it’s a strong signal that the other creditors are not likely to relent. While the ECB is nominally independent, it’s far more political than the Fed. And the tame market reaction to the surprisingly large margin of the “no” vote means it will have to deal only with political and not financial market considerations in deciding what to do next.

If and when the ECB does cut the ELA. it’s game over for Greece. From the Financial Times:

On Monday, the ECB may determine that the path to default is now so much clearer that it must ask for even more collateral to keep the current €89bn lifeline open. For banks already short on collateral — and one of the four big Greek banks is known to be on EU authorities’ watch list — that could push them over the brink into bankruptcy.

The ECB is unlikely to take the more drastic step of entirely withdrawing emergency funding on Monday, however. The last time Athens came this close to “Grexit”, in mid-2012, Mario Draghi, the ECB president, decided it was too momentous a decision for unelected central bankers to make, and warned the EU’s political leaders they would have to make the ultimate choice on their own.

According to two eurozone officials, in July 2012 Mr Draghi told the heads of the European Commission, European Council and eurogroup of finance ministers that they would be asked to guarantee the Greek bonds and other government-backed securities being used by Greek banks in return for ELA. If they demurred, ELA would be pulled and Grexit would ensue. 

Samaras knuckled under in 2012. But the lenders no doubt had a good reason to think he would.

We need to stress that merely refusing to increase the ELA will strangle the banks and the economy, and quickly, too. The decay will not be liner and it will probably start to accelerate this week if the ECB does not relent. This is no different than Sherman’s march to the sea, when General William Tecumseh Sherman engaged in the first large-scale example of scorched earth warfare, destroying homes, crops and infrastructure on an over 300 mile swathe through Georgia. While this may not subdue the Greeks, it would presumably decourager les autres.

Readers have no doubt heard about Yanis Varoufakis’ surprise resignation as Finance Minister. It’s being spun as a way to undercut creditor excuses for being difficult with Greece by removing a major negotiating impediment. But the Guardian live blog reported prior to his departure that leaders of other parties that Tsipras was meeting this morning to get their support for his new initiatives with the creditors were calling for his resignation. And I wonder if this had anything to do with it, that Varoufakis had tired of fighting internal hardliners as well as European officials. From Ambrose Evans-Pritchard at the Telegraph:

Syriza sources say the Greek ministry of finance is examining options to take direct control of the banking system if need be rather than accept a draconian seizure of depositor savings – reportedly a ‘bail-in’ above a threshhold of €8,000 – and to prevent any banks being shut down on the orders of the ECB.

Government officials recognize that this would lead to an unprecedented rift with the EU authorities. But Syriza’s attitude at this stage is that their only defence against a hegemonic power is to fight guerrilla warfare.

Hardliners within the party – though not Mr Varoufakis – are demanding the head of governor Stournaras, a holdover appointee from the past conservative government.

They want a new team installed, one that is willing to draw on the central bank’s secret reserves, and to take the provocative step in extremis of creating euros. 

I hate to give a cold dose of reality, but these measures would not solve any of Greece’s problems. If Greece goes rogue and prints euros without authorization, it will become a pariah quickly and will justify the ECB going nuclear. Trying to raid accounts electronically would be deemed as hacking even if a team who didn’t know the systems could pull it off.

As much as I’d like to be hopeful about the Greek vote, I’m deeply concerned that like the Arab Spring uprising, which in the end seems to have done little to help struggling people in the Middle East, and led to civil war in Syria, that what seemed like a promise of a better day for ordinary people will lead to even worse outcomes. As much as the Eurocrats have become unaccountable and causally malevolent in how they operate, Greece is too weak a vehicle to take up a successful, frontal revolt. Greece’s defiance may put forces into play that will accelerate the dissolution of the Eurozone, which is inevitable given Germany’s insistence on running trade surpluses and its refusal to finance its trade partners or more to greater fiscal integration that would do more or less the same thing. But the Greek people themselves are not likely to come out winners.