A stealthy route to Grexit

6/7/2015

By Wolfgang Münchau

In Berlin, the belief is hardening that no deal can be reached with a government led by Tsipras

I admire Alexis Tsipras’s sense of humour. By replacing Yanis Varoufakis as finance minister with Euclid Tsakalotos, the Greek prime minister swapped a supposedly Marxist economist trained at the University of Essex for a supposedly Marxist economist trained at the University of Oxford. Surprisingly, a few people see this as a reason to be optimistic.

What we know about Mr Tsakalotos is that he is a tough negotiator who believes in debt relief just as his predecessor did. So does Mr Tsipras himself. The fundamental obstacle to a deal thus remains unresolved: Greece continues to say No to the old agreement, and Germany says No to everything else. The Germans clearly did not replace their finance minister yesterday. On the contrary, Berlin on Monday reaffirmed its position that, at present, there is no basis for a deal.

A new agreement between Greece and its creditors would require a series of political shifts to happen simultaneously over the next few days. For starters, the Greeks would need to accept an austerity programme and structural reforms very similar to the one they rejected in the referendum. And the Germans would need to accept debt relief. On the former, agreement may be easier now Mr Varoufakis is gone. When you compare the final offer of the creditors, now rejected by the Greek electorate, with Athens’ last offer, you would struggle to spot the actual differences. If everyone wanted a deal, I am sure an agreement could be fudged, and sold at home.

The trouble is I am no longer sure whether all the creditors — specifically Germany — still want a deal. In Berlin, the belief is hardening in official circles that no deal can be reached with a government led by Mr Tsipras. Some of the most aggressive comments come from the leadership of the SPD, Angela Merkel’s junior coalition partner, until recently a moderating influence in German politics. They are now a leading pro-Grexit force because they see an opportunity to mark out a populist political territory as their own.

As someone who follows the German debate in some detail, I see a lot of people genuinely looking forward to Grexit, oblivious to €87bn in estimated losses for Germany alone. The consensus in Berlin was that the Greeks have decided to commit economic suicide. When Mr Tsipras came back yesterday with an offer for new talks, Ms Merkel accepted that she will listen politely to him at Tuesday evening’s eurozone summit. The talk in Berlin, however, is not about compromise, but about how to organise post-Grexit humanitarian relief. The idea that Greece would remain in the euro is considered somewhat quaint.

The Greek strategy is to split the creditors. This is probably the best they can do, but it is not all that great, since an agreement requires unanimity. But at least it would end Greece’s political isolation. Paris and Rome seem more willing than Berlin to re-enter negotiations.

If a big package is not feasible, an alternative might be an agreement to restructure the Greek banking system only, and do nothing else. Unfortunately, the only institution with the financial capacity to do such a deal is the same European Stability Mechanism that would administer an ordinary loan programme. Any ESM deal, big or small, requires unanimous approval by its members, and I cannot see Germany approving a bank-only deal while the Greek government keeps on defaulting on its official creditors.

Another option to consider is a multilateral bank-only deal. Italy and France could lead a coalition of the willing to recapitalise the Greek banking system to the point that it has enough funds to allow the Greek government to lift the capital controls. At that point the Greeks could start defaulting on their official creditors.

I have no evidence that President François Hollande and Matteo Renzi, the French and Italian leaders, are willing to take such a huge political and financial risk. Neither of them wants a political feud with Germany.

My overall conclusion is that if Grexit were to happen, it would happen by stealth. The Tsipras administration one day introduces a euro-denominated liquidity instrument. If the banking system deteriorates further, the government will have to print so many of the new IOUs that they would change hands on the grey market for a discount. Eventually, the central bank will control the supply of that shadow currency. It may never become legal tender, but if there are not enough euros in circulation, it will become Greece’s de facto currency.

In other words, Grexit is now the default position. It is what will happen if Tuesday evening’s summit does not somehow break the current, agonising impasse.

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