Grexit Drama: Greek Government Capitulates to Germans, Gets 4 Month Bailout Extension

Last December I wrote that the populist political group which eventually took over the helm of the Greece government made empty promises which will not be fulfilled: 

The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy.

So in the recent “game of chicken” in terms of the negotiation for a bailout, the “chicken” appears to be the new Greek government who just folded to the Germans. 

From the Independent: (bold mine)

Germany and Greece agreed a breakthrough deal last night to extend the stricken Mediterranean country’s rescue loans package and stave off the immediate prospect of it crashing out of the eurozone.

The package was presented as a deal done by the eurozone countries together, but there has been little doubt throughout the tense and at times angry negotiations that it was Germany which pulled the strings.

Having refused to grant Greece’s request of six months’ grace on its loans and a rapid rolling back of austerity measures, Germany eventually accepted the belated compromise of a four-month extension.

That means Greece will now not run out of money next month and allows the new government in Athens space to continue negotiating with its creditors for a relaxation of the terms of its debt.

However, while the extension will get Greece through its spring loan repayments to the International Monetary Fund, it is not long enough to last through the €7bn of loans due to be repaid to the European Central Bank in July and August.

The U-Turn

In an indication of how ill-tempered the talks were between Germany’s hardline austerity proponent Wolfgang Schäuble and his opposite number from Greece, the finance minister Yanis Varoufakis, Mr Schäuble hinted that he had scored a great victory.

“The Greeks certainly will have a difficult time to explain the deal to their voters,” he declared.

Several analysts agreed that the result of the talks amounted to a humiliating defeat for Greece.

Essentially, Greece has performed a U-turn on Prime Minister Alexis Tsipras’s declaration that the previous bailout was “dead”, along with the control of the so-called Troika of the EU, IMF and ECB. Under the deal, the current bailout continues under the auspices of the same international creditor groups.

PM Alex Tsipras even wrote an op ed recently supposedly to reach out to the Germans but avowed their firm commitment to ‘end the extend and pretend logic’.

Apparently the Tsipras government has chosen “convenience” over their demagogic “principle” of overturning the current relationship between Greece and the EU as well as with the other creditors.

So essentially the sellout means current ‘extend and pretend’ arrangements will be maintained to the benefit of the status quo (the despised bankers and the oligarchs). This also means Greek voters have been left to hang out dry.

It’s a great example of the Public Choice theory—politicians act based on  self interest—or in the present case of how politicians use the populace to get into power and eventually turn their backs on them.

But it’s not over though. The German led Eurogroup-Greek deal has just been a temporary financing agreement with more negotiations to come. Perhaps this could just be an opening  act. We’ll see.

The details of the Tsipras sellout from Open Europe (hat tip Zero Hedge)[ italics mine, bold original]

What points has Greece capitulated on?

Completion of the current review – Greece has basically agreed to conclude the current bailout. Any funding is conditional on such a process:

Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup.

This is a clear capitulation for Greek Prime Minister Alexis Tsipras, who said the previous bailout was “dead” and the EU/IMF/ECB Troika is “over”.

Remaining bank recapitalisation funds – Greece wanted this money to be held by the Hellenic Financial Stabilisation Fund (HFSF) over the extension period, and possibly be open for use outside the banking sector. However, this has been denied and the bonds will return to the EFSF, although they will remain available for any bank recapitalisation needs.

Role of the IMF – The Eurogroup statement says, “We also agreed that the IMF would continue to play its role”. Again, Greece has given in on this point and the Troika continues to exist and be strongly involved in all but name.

No unilateral action – According to the statement,

The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.

In light of this, a large number of promises that SYRIZA made in its election campaign will now be hard to fulfil. In the press conference given by Eurogroup Chairman Jeroen Dijsselbloem and EU Economics Commissioner Pierre Moscovici, it was suggested that this pledge also applied to the measures which were announced by Tsipras in his speech to the Greek parliament earlier this week – when he announced plans to roll back some labour market reforms passed by the previous Greek government.

Four months rather than six months – Greece requested a six-month extension, but the Eurogroup only agreed to four months. This is a crucial point: it means the extension expires at the end of June. As the graph below shows, Greece faces two crucial bond repayments to the ECB in July and August which total €6.7bn. This is a very tough hard deadline. There is limited time for the longer term negotiations which will take place – provided that a final agreement on the extension is reached. It is very likely we will be back in a similar situation at the end of June.

Has Greece secured any wins?

Greece has received a couple of small fillips in the wording:

The institutions will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account.

This suggests that Greece may, during this year and the extension in particular, get more fiscal leeway. As we predicted many times, this would manifest itself as a lower primary surplus target. A small victory which may provide a bit of temporary breathing space for the government. In practice, though, it was already looking difficult for Greece to meet its target this year given significant shortfalls in tax revenue.

Greece also managed to get the word “bridge” into the statement, and a specific promise to discuss a fresh programme and approach:

This extension would also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece.

What happens now?

As was stressed in the press conference, Greece will on Monday “present a first list of reform measures, based on the current arrangement”. Moving forward from this agreement, which is still largely in principle, will be conditional on these measures being judged as sufficient by the EU/IMF/ECB as a step towards completing the current bailout.

Once that is confirmed work will begin on getting the “national procedures” in place, so that all the necessary parliaments (such as Germany and Finland) have approved the extension by the end of next week.

In the not too distant future, discussions will begin on the “possible follow-up arrangement”. As we outlined in extensive detail here, there are a huge amount of differences which need to be resolved. The crucial ones being labour market and pension reforms, as well as debt relief. Chances of an agreement remain unclear, but we would expect Greece to struggle once again to get what it wants.

So record stocks have all been about anticipation of a nonevent.