Greece's 'Plan B' Details Emerge

Observers have taken an almost prurient fascination with some sketchy details of the contingency plans then Finance Minister Varoufakis had developed for Greece if forced to leave the financial union.  They are hardly surprising in substance.

It was quite clear that gaining control of the actual central bank's reserves was an essential step.  We had warned that replacing the central bank governor with an ally from the Syriza government was a logical strike the escalation ladder.  A separate or similar payment system would have been necessary.  The particular institutional and technological idiosyncrasies of Greece shape the actual details.

There are three, more essential issues from which the focus on "Plan B" distracts us.  Very first is the realignment among the lenders.  In particular, the IMF's insistence upon debt relief brings it to loggerheads with Germany and several additional Eurozone members.

The expiration of the 2nd aid program at the end of 06 also signaled that end of the IMF program that would have run through March 2016.  The IMF formally canceled its roughly 28 bln dinar program, having only paid about 12 bln euros.  At the end of last week, Greece requested an additional IMF package, which it had to perform as part of its application for any new three-year loan facility from the ESM.

If the European creditors insist on the actual IMF's involvement from day one of the new package, it will bring forward the debt relief discussion.  This is obviously, exactly what Greece would like.  However, a number of European countries are unwilling to talk about debt relief until verification that Greece is implementing the actual reforms it promised.  The actual IMF could wait until after the first review, which could take place in the actual Oct-Nov period unless there are snap elections that could disrupt the timeframe. 

The 2nd and arguably the most important point now that the negotiations have begun is whether Greece will need to pass additional reform and austerity steps.  Recall Greece passed two important omnibus bills that basically committed the Tsipras government in order to implementing the prior governments’ commitments and much more.  These were seen as prerequisites in order to beginning negotiations for a third package and the 7 bln euro bridge loan. 

Greek negotiators argue that these measures should be adequate to free up the first tranche associated with aid.  Recall that help has been unavailable since final summer.  The previous government, brought by New Democracy's Samaras didn’t implement the accord.  Syriza's election was not the cause of the help freeze but may have been the result.

The passage of the various measures after the nerve -fraying referendum in which the Greek people voted to reject the creditors' demands has weakened the Syriza coalition.  The actual leftwing of the government has been purged, and Tsipras has had to depend on opposition votes to pass the actual measures.  In some ways then he has become a minority government.  Alternatively, using the opposition in disarray (new head of PASOK and leadership contest in the New Democracy Party); Tsipras prospects a unity government associated with sorts.  

Tsipras, the most popular politician in Greece and tasked with implementing a program he does not believe in, could be re-elected.  The purpose, however, is that if the creditors demand additional measures because the condition of aid, the political situation could reach a breaking point, which would only slow the change efforts and weaken the economy further.

The creditors organized a tight timeframe to keep pressure on Greece.  The Seven bln euro bridge loan just provided to service Greece financial debt that had come due.  It doesn’t cover the 3.2 bln pounds owed to the ECB on July 20.  Greece also encounters interest payments and a small mortgage repayment to the IMF next month.

The third issue involves Greek banks, markets, and capital regulates.  Greek banks have re-opened, however capital controls remain in location.  At the end of last week, tweaking of some exceptions and guidelines occurred, mostly to help help external payments by businesses and individuals (including tourists as well as students).  The Greek stock market and other financial markets will likely open before the end of the week.  The announcement of new rules and restrictions is forthcoming.  The prohibit on short selling extends through August 3.  Even when the stock market re-opens, it is possible that they will not really allow trading in Greek banks. 

The plight of Greek banks is widely recognized, even though they managed to raise about 8 bln euros last year.  Deposits have fled.  The most recent figures suggest that some 8 bln euros or 6% of Ancient greek deposits disappeared from the banking system last month.  Non-performing loans of Greece's top four banks stood at 35% at the end of last year, and could only have deteriorated further this year. 

Greek banks appeared to have adequate Tier 1 capital (12.8%), but a good part of this is DTA (deferred tax assets).  These are tax credits, which can offset future profits, but are barely usable funds.  The cost of Greek bank recapitalization hinges on the DTAs is going to be retreated. 

Greece has approved the Bank Recuperation and Resolution Directive.  It allows for the bailing in private creditors and depositors (in excess of 100k euros) before government (taxpayers') funds are used.  It’s to start at the beginning of 2016.  Varoufakis' replacement in the Greek Finance Ministry, Tsakalotos has pointed out bank recapitalization will begin this year.  Numerous recognize the bailing uninsured depositors may be counter-productive. 

Much of those uninsured deposits would be the working capital of small and medium size Greek businesses.  Penalizing them may likely produce further deterioration from the loan books. Nevertheless, some countries, including Germany, tend to be reportedly pressing for this kind of action as the condition for recapitalizing the banks.  There is some discussion whether the ESM should take an equity stake too.

Two other issues can be found that many, including Varoufakis, struggle to understand.  First, there is a clear link between solvency and sovereignty.  The more insolvent a country is, the less sovereignty they have.  Greece is insolvent.  It’s lost much of its sovereignty.  When Varoufakis and others complain about the encroachments into Greek sovereignty, it shows they fail to appreciate this critical hyperlink.  Greece is doing things through force that other nations have a choice about, for example whether shops should be open up on Sunday, or when to pass the Bank Recovery and Resolution Directive.  It also has to accept EU officials baked into numerous ministries. 

Second, Varoufakis and his many sympathizers neglect to appreciate that Germany, the actual creditors, and the euro, are not to blame for all of Greece's problems.  Similarly, many of Varoufakis' critics fail to recognize any role in any way of external factors.  One cannot dismiss as a German born plot the role of the oligarchy within Greece, or the prevalence associated with rent-seeking behavior and tax avoidance.  Varoufakis and the Syriza fundis talked tough but did nothing to address them even just in the most preliminary way.  

Greece can take numerous other measures to learn effectively to cope with the structural rigidities resulting from the surplus countries in EMU neglecting to offset the restrictive course of the actual deficit countries.   Ultimately, creating the conditions for sustained development arguably will do more to help Greece than all the whining about EMU’s systemic defects or the creditors’ hypocrisies.

Greece: Thank You Sir, Can I Another? is republished with permission from Marc to Market