Greece may be forced to exit euro zone to achieve its reform proposals

In order to renegotiate its debt burden, the Syriza government of Prime Minister Alexis Tsipras has been forced to abandon most of its campaign promises including a write off of some of its debt, and removing most of the austerity conditions that were part of the original agreement. Indeed, the new agreement is simply an extension of the old one and will give Syriza just four months breathing space before huge payments will be required for maturing European Central Bank bonds. Germany has been insistent that there be continued onerous conditions placed upon extension of the bailout. Commentators such as the economist Paul Krugman and Joseph Stiglitz claim that the imposition of strict austerity conditions is counter-productive. The policies reduce demand producing depression and high unemployment. Increased public spending is needed to spur growth.

 While liberal economists are no doubt correct about the negative consequences not only for the populace but for economic growth that austerity produces, the aim of the austerity policies are to restore profitability and improve conditions for capital. The reforms involve cutting back on government and privatizing public facilities and services. The reforms increase unemployment resulting in a larger "reserve army of the unemployed" that will reduce labour costs and weaken union power. Expectations about what the government is able to provide in terms of social services will be reduced. All of these types of measures increase the power of capital over labour and make capital more competitive eventually improving the profit picture over the longer term. Proponents of the austerity measures point out that Greece has already reached a point where it has a surplus. The fact that it also has twenty five percent unemployment rising to fifty percent among youth is neither here nor there. Indeed it ensures that labour costs are lower. It also supplies a flow of frustrated but often skilled Greek workers into other parts of Europe helping to lower labour costs in other areas.

 The Germans have support from governments in Spain, Portugal, and Ireland who also were subjected to painful austerity policies. The Germans and their allies do not want to see their policies undermined by giving Greece less harsh terms and conditions for dealing with their debt situation. Italy and France are also attempting to impose structural reforms on their labour force. The electorate in Germany and elsewhere support harsh treatment of the Greek. Two thirds of the German populace do not want Greece to receive any concessions. Many think that Greeks are lazy, get huge pensions, and are corrupt. Of course some are, but actually the Greeks who do work are working more hours than in any other European country. If measured in hours worked, it is the Germans who are the laziest Europeans!

 The European Central Bank put pressure on the Greek banks by withdrawing their ability to use Greek sovereign debt as collateral for liquidity provisions. Depositors became worried and withdrew billions of euros each day.The Greek government was also faced with obtaining funds to pay debts and wages.Unless a deal was reached the Greek government faced an ever worsening financial crisis. T he Eurogroup, led by Germany. used these conditions as leverage to force the Syriza government to accept a deal with very few concessions. In order just to stay alive for another four months, the Greek government promises to achieve appropriate surpluses, and refrain from any unilateral actions that would impact negatively on fiscal targets.

Most of the reforms that Syriza campaigned upon will be impossible under the terms of the agreement, including raising the minimum wage and reversing privatizations, although there are signs that the government may attempt some of the reforms under the rubric of relieving the humanitarian crisis. However, they may find that their EU partners simply refuse to send money on the grounds that the government is not meeting the terms of the agreement.

 Costas Lapavitsas, an economics professor and Syriza MP, notes that not only did the Greek government pay a high price to stay alive, the situation is made even more difficult by the state of the Greek economy. The economy grew only 0.7 per cent last year and actually declined in the last quarter. It had been shrinking ever since the austerity policies had been imposed. Even during the Xmas season retail sales fell by 3.7 percent. There is evidence of a deflationary spiral with prices declining by 2.8 percent in January alone. Lapavistas claims: "This is an economy in a deflationary spiral with little or no drive left to it. Against this background, insisting on austerity and primary balances is vindictive madness." At the end of the four months, Greece will face even more demands and will need more funds to make even larger payments than during the four month reprieve. Lapavistas maintains that Greece should go ahead implementing measures that it campaigned on, including forbidding house foreclosures, writing off domestic debt, raising the minimum wage and stopping privatizations. He claims that carrying out these policies rather than fiscal calculations must be the main priority of the government in order to keep popular support.

 There is some evidence that Lapavistas viewpoint is being accepted in part, as the government forges ahead with some policies that will bring it in conflict with the EU. In Lapavistas' view the euro zone is not capable of being reformed and he claims the common currency has become an absurdity. He believes that in the next negotiations the Greek government should present radical proposals. No doubt these will not be accepted by the Eurogroup but then Lapavistas' said that the government should prepare the people for a possible exit from the zone. This position appears not to be shared by Finance Minister Varoufakis who promises he will do anything to stay in the euro zone. He has kept that promise.

 A majority of Greeks support the manner in which the Greek government carried out negotiations. A large majority also favor staying in the euro zone. Perhaps within the next few months it will become clearer to the population that if they stay in the zone then they will be subject to more austerity and a continuing debt trap. Lapavistas is not alone in suggesting an exit from the euro zone or Grexit as it is called. This article argues in a similar vein. An exit from the zone will be very difficult.

Syriza throws in the towel and stocks soar as deal on Greek bailout reached

Brussels - Even the proposals presented earlier that Germany rejected were a sell out of most of the campaign promises made by Syriza including the demand for writing off some debt and for a new agreement rather than an extension of the existing bailout.

The new agreement makes it even clearer that Syriza is definitely committed to repudiating those promises, but goes much further. During the four-month extension period of the present bailout, Greece will be subject to exactly the same austerity conditions that were agreed to in the original memorandum of agreement(MofA). The sellout set forth in the original Greek proposals did not satisfy Germany, which wanted even more ironclad guarantees that Greece would keep to the original terms of the agreement. In return Greece managed to convince the EU finance ministers that its target surplus should be tied to its economic situation in 2015. Germany wanted not just a Greek sellout but a super sellout, and got it. The full text of the agreement can be found here. 

 In this article I will analyze specific parts of the deal that show how Syriza has repudiated its campaign promises and agreed to do nothing that would be inconsistent with what the Eurogroup or even the old Troika think is inconsistent with obligations in the original bailout agreement. 

The agreement notes that the extension of the loan(MFFA) is within the framework of the existing arrangement. There is no new deal. The old bailout is back with a vengeance. So is the review "on the basis of conditions in the current arrangement": The Eurogroup notes, in the framework of the existing arrangement, the request from the Greek authorities for an extension of the Master Financial Assistance Facility Agreement (MFFA), which is underpinned by a set of commitments. The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement, making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions.  

 The Greek government must present a list of reform measures "based on the current arrangement." This means "reforms" consistent with the austerity policies that are part of the current arrangement. Syriza can forget about raising wages, rehiring workers, or any roll back of privatization. There may be some reform measures the Greek government could provide agreeable to the Eurogroup such as improving tax collection that would be consistent with campaign promises but certainly most of the reforms Syriza supported would be opposed to the "current arrangements". The document goes on: The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review. This list will be further specified and then agreed with the institutions by the end of April. This is a huge semantic victory. Instead of the Troika we now have " the institutions." Under the "current arrangements" the Troika are the "institutions." This renaming goes on throughout the document: 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. The Troika(institutions) must approve of the conclusions of the review to ascertain whether Greece is meeting the conditions of the bailout. The Eurogroup must also approve.

 The Syriza government faces many hoops to jump through before it gets any money. If it fails to adequately pursue the very austerity policies it campaigned against, it will not get a cent. Contrast what the Greek government agreed to with what Finance Minister Varoufakis said at the end of January: Varoufakis said Greece had no intention of cooperating with a mission from the lending "troika" of the European Union, European Central Bank and International Monetary Fund, which had been due to return to Athens. He said Greece would not seek an extension to a Feb. 28 deadline with euro zone lenders. 

 Now as part of the deal to get a loan, the government commits itself to working again with all three but consistent with the tacit agreement not to call a spade a spade, the Troika are no longer mentioned: In this light, we welcome the commitment by the Greek authorities to work in close agreement with European and international institutions and partners. Against this background we recall the independence of the European Central Bank. We also agreed that the IMF would continue to play its role.  

Although Syriza and Finance Minister Varoufakis several times indicated that they would honour their financial obligations rather than seek a debt write off, the document emphasizes the point: The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely. During the four-month extension of the loan, the Greek government cannot hope to enact any policies that the "institutions" think would negatively impact what they see as the policies and structural reforms in the original bail out agreement. Forget trying to roll back austerity policies, privatizations, or layoffs: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. 

 Varoufakis promised that he would do whatever was necessary to forge a deal that would keep Greece in the euro zone. His government kept that promise. Keeping it pleased the stock markets with the Dow reaching new highs after the announcement of the deal. The crisis is not over yet however. You might say the deal has kicked the crisis can down the road four months. The deal runs out just before a number of Greek debt repayments are due. Syriza will then play Super Sellout Part II. 

There is a slim chance that Syriza might have a surprise Monday. It could present as reforms all the policies it campaigned on. The Eurogroup would be outraged and the stage would be set for a Grexit. That is what Greece should have done long ago but there is no sign of any planning for that step by the Syriza government.

Syriza appears headed for victory in Greek election

Athens - In an attempt to reassure the EU public and officials that a Syriza victory is not a threat to the EU, leader Alex Tsipras, has published opinion pieces in both the FInancial Times and earlier in a German newspaper, Handelsblatt. In the Financial Times article, Tsipras promised that Syriza would not only respect European Union fiscal rules but would also commit to their targets on eliminating the deficit. Tsipras is trying to convince Greek creditors that his victory is not a threat to them or EU unity. At the same time Tsipras reiterates his demand for a " new social contract" and an end to austerity requirements, claiming that this would lead to "political stabililty and economic security". Tsipras also promised: “A Syriza government will respect Greece’s obligation, as a eurozone member, to maintain a balanced budget, and will commit to quantitative targets." Tsipras also spoke of a write off of some Greek debt as something that could be done cooperatively and without conflict:" “We have a duty to negotiate openly, honestly and as equals with our European partners. There is no sense in each side brandishing its weapons.”"

While all this sounds very promising and accommodating, officials of the Troika, the International Monetary Fund, European Commission, and the European Central Bank may not be willing to make changes to the austerity conditions demanded for the Greek bailout. German Finance Minister Wolfgang Schaueble has stressed many times that the radical changes sought by Tsipras are not even up for negotiation at all. In a television interview Dutch Finance Minister. Jeroen Dijsselbloem , said: "There's no political support to write off Greek debt". Tsipras' demands include a write off of some of the Greek debt. The Dutch minister did suggest that easier repayment terms might be arranged if conditions required that.

Syriza or Coalition of the Radical Left, is an alliance of many different types of leftists including a variety of socialists including Marxists, Maoists, Trotskyists and Greens.The Communist Party of Greece is not a member of the alliance even though Tsipras was himself once a member of the party. He stayed the Sinaspismos party when the communist party exited that group. He was president of the party for some time. The party is the largest group within Syriza. A poll released by the University of Macedonia on Tuesday showed that Syriza had a 6.5 percentage point lead on its nearest rival prime minister Samaras' center right New Democracy party. A graph chart of the average of recent polls can be found here. The graph shows Syriza with 35 percent of the vote compared to New Democracy at 31. A new party To Potami also left-leaning has 6.5 percent of the vote. Golden Dawn a radical right anti-immigrant party, with several prominent members in jail, nevertheless has 6 percent of the vote, and finally the Greek Communist Party KKE has 5.5 percent of the votes. The party that gets the highest number of votes get an extra 50 seats making it easier to form a coalition government. The leader of To Potami has not ruled out joining in with Syriza to form a government so Syriza does not need a majority in order to form a government. There are other minor parties who might join a coalition as well.

The Greek stock and bond markets seem not be soothed by Tsipras' attempts to dampen establishment fears. Greek bonds had the worst returns last month of any sovereign issues. Over the same period the Athens stock exchange performed worst of all major equity markets. The real drama will begin when the results of the Greek elections this Sunday begin to come in.

European banks get ready for possible Grexit

Both banks and brokers are dusting off contingency plans for a possible Greek exit from the eurozone (Grexit). While most think that Greece will remain in the zone, the snap elections to take place January 25 may make such an exit more likely.

The latest poll shows the leftist anti-bailout party Syriza increasing its lead over the ruling coalition of Prime Minister Antonis Samaras' New Democracy. Syriza has the support of 31.2 percent versus 28.1 percent for New Democracy. This 3.1 percent lead compares with a 2.6 percent lead in an earlier January poll. To win an outright majority the leading party would require from 36 to 40 percent of the vote. Syriza is not expected to achieve that, but under the Greek system the party getting the highest vote count receives an extra 50 seats and this will make it easier for Syriza to form a coalition with one or more smaller parties. The survey was carried out from January 13-15 and so is quite recent.

 Syriza opposes the austerity requirements imposed by the Troika , the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB), as part of the Greek bailout terms. It also wants to write off some of the Greek debt.The Troika has spent $284.23 billion bailing out Greece. Many think that Greece will stay within the eurozone even if Syriza wins and Tsipras himself says that he wants to stay in the eurozone, as do a considerable majority of Greeks. Banks, nevertheless, want to be prepared just in case Greece does eventually leave. Citigroup, and Goldman Sachs are among those who are running tests to ensure that their trading platforms could deal with a new Greek currency , probably the drachma.

 Malcolm Barr, of J.P. Morgan writes: “The region has come far enough since the heights of the crisis to withstand a Greek euro exit intact. Though there would be a shock to confidence and growth, we would not expect others to follow a Greek euro exit." J.P. Morgan believes that if Greece did exit the eurozone, the euro would fall from 1.181 to the US dollar now to just 1.05 if the ECB balance sheet expands by 4 trillion euros to stem any contagion.The company thinks that, unlike 2012, the structures now in place could deal with any strains Grexit would create.

 Tsipras has been busy modifying some of his more radical policies. He even penned an op-ed in the Handelblatt, a German business newspaper. In it he claims that Syriza sought a new deal for Greece but within the framework of the eurozone. The deal would allow Greece to finance growth and by doing so make it possible to sustain payment on its debts. Tsipras complained: “The truth is that Greece’s debt cannot be repaid as long as our economy is subjected to constant fiscal water-boarding.” A Syriza victory would encourage other leftist parties such as Podemos in Spain to continue the focus on jettisoning austerity programs to allow for growth.

Syriza moves to the middle as it seeks to win Greek election

In In order to gain enough votes to win elections leftist parties often jettison their more radical positions in order to attract voters more to the middle of the political spectrum. This is clearly a strategy that Syriza is pursuing.

The leader of Syriza, Alex Tsipras, has stressed recently that he does not want Greece to leave the Euro zone. He expresses optimism about creating conditions for repaying Greek debts:Tsipras reiterated that he wanted Greece to stay in the euro zone. "Our goal is to reach a new agreement -- within the euro zone -- that would allow the Greek people to breathe ... and to live in dignity by restoring debt sustainability and finding a way out of recession through financing growth," Syriza is either abandoning or not mentioning many of the policy planks adopted at its first Congress in July of 2013. The policies are set out in detail here. The policies include the following: "..withdrawal from NATO, closure of all foreign military bases, termination of military cooperation with Israel...and the application of the principle “no Greek soldier at war fronts outside Greece’s border”. The struggle for peace and nuclear disarmament is of top priority for SYRIZA and it is closely related to the struggle for democracy." Tsipras on Twitter the other night said: “A breach with NATO is not in the interest of the country.” He went on to say that Greece is bound by and will comply with international agreements that it has with the EU and NATO. As Eirini Karamouzi, of the University of Sheffield put it: “The flagship of their policy is debt relief, and their main preoccupation will be domestic. There’s no bargaining chip for Greece right now to lead on the main foreign-policy fronts.”

 The mainstream business press rather than becoming less strident in their critique of Syriza has suffered from bouts of hyperventilation at the thought of Syriza taking power, resulting in extremist rhetorical polemics: The Wall Street Journal has called SYRIZA leader Alexis Tsipras “the Hugo Chavez of the Balkans”, saying that his economic program will set him on a “collision course with the rest of Europe”. Bank of America Merrill Lynch described the SYRIZA economic program as a “Greek Tragedy”, and a senior analyst with the Capital Group, a fund with US$1.4 trillion in assets, described SYRIZA’s program as “worse than communism” and “total chaos”.

Syriza does still seem to be on a collision course but with the Troika, rather than with Europe as a whole, since France and Italy also oppose the strict adherence to austerity policies that the Germans are pushing. Syriza and the situation in Greece represent the same discontent with austerity policies that can be found in many southern European countries. Ian Kearns, of the European Leadership Network claims: “This is much more about a crisis of European politics now and whether particularly the southern European publics are willing to stay with this project if it means almost endless austerity.This all potentially contributes to a less cohesive Europe, to a weaker Europe.” The European status quo is also threatened by the growth of parties on the right as well as those on the left such as Syriza.