Greece Talks Fail: Instant Reaction
I’m not surprised that the talks today broke down. Although it happened much sooner than I expected!
Today, as I wrote earlier, was not a hard deadline.
The sticking point is that the Troika (or “the institutions” to use the new language preferred by the Greeks) are determined that any additional financing comes with the conditions that the Greeks won’t accept.
So what happens now?
That depends on how hard the Troika want to play.
Real “hard ball” would look something like this:
1. They stick to the demand that the “next step” has to come from Greece and that Greece has to ask for an extension to the programme (i.e. The current bailout package of lending in return for conditions).
2. Greece doesn’t do that.
3. The European Central Bank, which has already tightened the screws on Greece, tightens them further. For example, by making clear that ELA (the funding on which Greek banks are increasingly reliant) will not be forthcoming if there is no programme in place.
4. At that point March starts to look like a ‘hard’ deadline. A hard deadline being the point at which either the Greek government or banks run out of money.
Last week I asked, why would the Troika -I mean, the institutions — agree an extension when an extension would weaken their hand by removing pressure on Greece?
Today, I offered one possible answer — politics, whether through the benevolent notion of European solidarity or the cold calculation of geopolitics.
So far it looks like the Troika is letting economics and financial logic trump politics and upping the pressure on Greece.
I still think a deal is not only possible but more likely than not. But getting there is going to be rough and the odds that it involves a period of Greece in the ‘Euro but with capital controls’ just rose.
Here is what the ‘optimistic scenario’ looks like:
- Current programme ends on the 28th Feb.
- Possible capital controls in Greece in March as deposit outflow from banks picks up.
- Greece applies for a ‘new programme’.
That allows the talks to start again, essentially from scratch, without the difficulty of existing commitments. Or the language of ‘extending the programme’ versus ‘bridging loans’.
That gives all the players more political space to strike a deal without ‘breaking electoral promises’/’rewarding bad debtors’.
This optimistic scenario involves the risk of an accident rising (things go wrong and Greece leaves the Euro) and it will be a very bumpy few weeks.
The Troika appears prepared to relax the primary surplus targets/ease austerity and Greek government seems prepared to not enact all of Syriza’s manifesto. It’s hard to feel it right now — but that’s grounds for optimism.
