The final stages of the battle have begun. Merkel and the Troika against Tsipras and Varoufakis. How will it end?
We assume here that the budget for Greece is balanced now, and likely to be balanced in the future.
Can they agree on anything?
So far they have agreed:
1) It is best to stay in the Eurozone for all concerned, there won’t be a Grexit.
2) A 1% primary surplus this year, and 2% next, effectively paying part of the interest which is due on the 320bn debt.
What they cannot agree upon is:
3) Troika wants cut in Pensions of 1% of GDP.
4) Troika wants increase in VAT of 1% of GDP.
5) Greece wants some further help to boost the economy, allowing some infrastructure spending.
6) Greece wants a restructuring of the Euro 240 bn debt to other European countries, the EU and the IMF.
Strength of the Eurogroup negotiating position:
Very weak, if the budget position of Greece is in primary surplus, as it probably is, if only slightly. That would mean that internally, Greek’s government income from taxes matched its outgoing.
Ultimately, there is no sanction for Greece other than a moral condemnation if it unilaterally decides to stop payments to its creditors.
That ECB would stop financing Greeks banks via ELA is very unlikely. There is no way Greece can be pushed out of the Eurozone
Strength of Greek negotiating position:
Extremely good. If they think they have a balanced budget. They could just leave all creditors and walk away from debt. Or they could choose to pay some creditors (private bond holders) and declare moratorium on public debt to EU.
Greeks know that they economically in the right – and have broad support of economists. Greek government has won the propaganda battle, which explained their situation in European press as well as they can.
However, Greek government probably does not know that cutting themselves off from the EU-Troika mandates by unilaterally declaring a moratorium would bring calm and stability into the Greek economy. Sounds counterintuitive, but think about it. The moratorium loan would quickly be out of sight/out of mind.
Initially bilateral lenders would be furious, especially Spain, Finland, Slovakia, so a mutually agreed settlement will now be high priority, which will probably link repayments to GDP growth rate. So, once all the debt is in a moratorium situation, it is up to the creditors to restructure it quickly in a mutually acceptable way, if they want Greece to pay anything – and avoid contagion, while making sure that all countries get back what they put in. Only the ECB can help here with QE.
However, international credibility would be lost, as defaulting only 5 months after election victory tricky. Against that, credibility will be regained if moratorium works and Greek GDP growth can be restarted quickly and unemployment falls.
What is the likely outcome of negotiations?
Some fudge on the outstanding issues, with implementation dates put into the future.
3) A cut in pensions of, say, 0.2% of GDP (300m) next year (rather than 1.8 bn proposed by Troika), and a cap of pension spending (pensions of 2016 + half GDP growth) for the following two years.
4) VAT increases something similar. Perhaps a 0.4% increase of VAT this year, followed by VAT increase of 0.8% of GDP for the next – this has already been proposed by Greek government.
Further taxes, as proposed by Tsipras government, make up some of the shortfall
5) Early access to the 330 bn Juncker growth fund 1 – 2 bn to kick start economy in growth.
6) Cutting interest rates further on EU debt to Greece, all the way to 0%. (ECB uses QE for all of Greek debts to its institutions and to the EU countries). This could be subject to further review if GDP growth rates based repayments are appropriate. So no restructuring, but prospect of restructuring.
Here all parties save face, and nobody looses out. None of the creditors will be disadvantaged. Some investment from Juncker fund, which will come through anyway soon. No cut of the debt, yet, but restructuring promised.
However, is that the best solution?
No. The Greek government should reject it, once it is sure what the best deal possible could be. It should default anyway. And declare a moratorium on its debt to EU institutions and countries.
Why a moratorium? Just to get out of the destructive negotiation circle, which undermines any confidence in the economy. And to have more growth, as economically senseless cuts will not have to be implemented.
Greece government also has to be seen to
a) not borrow any more money
b) stand on its own feet and show that they can govern.
Only through a moratorium can this be achieved. Only then will confidence in the economy return.
So my prediction is that the above outlined deal is probably as good a deal as they can get.
Whether Greek government will accept will depend whether it values its own destiny and a moratorium more than the destiny prescribed under the Troika.
I think Greece will choose its own destiny.