Tuesday, February 3, 2015

Support grows for fresh negotiations on Greek bailout outside of Troika


Greek finance minister, Yanis Varoufakis, is gaining support in high official circles for his refusal to negotiate Greek debt provisions through the Troika arrangement with the European Commission, European Central Bank, and International Monetary Fund.
The president of the European Commission, Jean-Claude Juncker, claims that he wants to scrap the Troika's mission that at present governs oversight and negotiations over Greece's $360 billion bailout. However, the claim comes from a report by anonymous sources in the European Commission by the German daily newspaper Handelsblatt. The source quotes Juncker as saying that an alternative had to be found quickly. Again quoting unnamed sources, the paper also said that German government officials were prepared to reform arrangements for debt negotiations between the three members of the Troika and Greece. However, the sources also said that new arrangements would be possible only if the previously agreed reforms and savings targets were met. This would mean Greece would still be bound by the same arrangements that Syriza had vowed to reject. There is no mention of cutting debt. The reforms agreed to would include all the austerity provisions. 
Juncker is set to meet Greek Prime Minister Tsipras on Wednesday in Brussels. He has repeated again that he is not prepared to accept any direct write off of Greek debt, which at present is about 175 percent of GDP. However, it would seem that contrary to campaign pledges, Varoufakis is now suggesting a plan of "debt swaps" rather than any write-off of Greek foreign debt: Varoufakis called his plan a "menu of debt swaps" that meant Athens would no longer call for a write-off of Greece’s 315 billion euros ($360 billion) of foreign debt, the Financial Times reported. Varoufakis, in London, assured investors that Syriza's plan would not inflict losses on privately held bonds. He also pledged reforms to the Greek economy. The source said that the bond swap plan was a "work in progress": "These bonds held by the ECB right now can be restructured. It's possible to turn it into perpetual bonds to be serviced, or growth-linked debt. It's the same with a proportion of the other bilateral bonds held by the official sector." Varoufakis himself said: "What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda. I’ll say, 'Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece'.."We are in substantial negotiations with our partners in Europe and those that have lent to us. We have obligations towards them."  
The Greek government plans to target wealthy tax-evaders and predicts a budget surplus of 1 to 1.5 percent of GDP. He said the government plans to achieve this even if this means that it will not fulfill its election spending promises. Today Tsipras is meeting with Italian Prime Minister Renzi, who may be quite sympathetic to Tsipras' demand for more lenient lending terms. Michael Hintze, CEO of hedge fund CQS, was asked after Varoufakis' meeting with international investors if Varoufakis had proposed a debt swap and he said without elaborating: "It's more balanced and broader than that." While Tsipras and Varoufakis may manage to bypass the Troika, this does not mean that any debt will be written off, or that many austerity conditions will be removed, or that spending promises will be kept. 
Some sources are suggesting Syriza achieved a great victory: Although the financial media is blathering about negotiations and gamesmanship, the truth is Greece just blew up the Empire's Death Star of debt. There's nothing left to negotiate except the official admission that the Imperial Death Star of debt, the most fearsome threat in the galaxy, has been blown to smithereens. The author, Charles Smith, thinks that Greece will exit the euro zone and thus be released from the debt trap that it faced under the rule of the Troika. So far there is little evidence that will happen. The EU authorities may accept direct negotiations as appears to be already in progress but there is no indication of any debt being written off. 
What Syriza appears to have done so far, as well as bypassing the Troika,is to exploit divisions within EU authorities. Unlike Juncker, the German Finance Ministry through its spokesperson said: "The German government sees no reason to scrap this mechanism of evaluation by the troika." A Bloomberg article mentions that Varoufakis has co-written a text on Game Theory. His actions already appear to have achieved one goal, of negotiating outside of the bounds of the Troika. He also appears to have further split EU authorities with some agreeing to dump the Troika arrangement. On the other hand he has made strong moves to ease investors fears by plans that jettison the whole idea of a debt write-off. It is not clear, where this is all going but at present the Grexit scenario has receded into the background. 
Nicholas Spiro. of Spiro Sovereign Strategy in the UK, thinks that Varoufakis' anti-austerity rhetoric and moves against the Troika may be part of a strategy of trying to establish their credentials with their electorate but he concludes of Syriza's leaders:"They will play this game as long as they possibly can. This will give them political cover to climb down." This assumes that the goal of the game they are playing is to successfully negotiate an end to Greece's debt crisis with EU lenders. I think it is too early to tell. The moves are too ambiguous to be sure that is the goal of the game the Syriza leaders are playing. Most markets seem to be unfazed by what is happening and have been going up since Monday, until this morning at least.


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