European leaders have proposed an innovative new idea to keep Greece in the Eurozone. The latest scheme would see the embattled nation undergo a five year ‘timeout’ from the Eurozone.
Not much is known about what this timeout would look like in practice. But what we do know is potentially explosive in its effects.
The timeout would effectively amount to a creditor driven corporate takeover.
State assets would face a wave of privatisations that would be used to pay down Greece’s debt obligations. This would act as a stop gap measure if Greece fails to meet conditions for a new bailout.
Now, we know for certain that both parties are desperate for Greece to stay in the Eurozone. But the political will to do so depends on one party meeting the others’ demands. Anything short of that makes any agreement unlikely.
Yet, as desperate as they may be, you can’t fault them for their creativity. A five year timeout is an inspired idea, if nothing else.
But, like all before it, this effort to keep Greece in the Eurozone is destined to fail. It’s hard to escape the feeling that this is another episode of ‘been there, done that’.
Tempting Greece with an olive branch makes sense because Greece aspires to remain in the Eurozone. But shoving down stringent demands just flies in the face of what’s gone on before.
How is this idea any different to what’s gone on in the past few years? You could easily make the argument that Greece has been on a ‘timeout’ ever since the crisis began. This only serves to maintain the status quo, dressing it up in a new costume.
What will this mean?
It’s also not entirely clear what a five year moratorium would look like. There would be privatisations, but what else?
Would this agreement still keep liquidity flowing? Presumably, yes. Would it allow Greece to keep the euro? Again, one would think so. And what would happen to all those debt obligations? Would they be excused in exchange for the privatisations?
Unless German banks end up buying up Greek assets, that’s unlikely. They are, after all, the main providers of Greek liquidity.
This proposal doesn’t resonate with all European ministers either. Some of them are rightly bringing up the question of legality.
There’s no precedent in Europe for a five year stay of execution. Some think that such an arrangement would not only be unwise, but altogether unlawful.
Even French president Francois Hollande counts himself among its detractors.
He wants to see a conclusive resolution to the Greek crisis. For him, it’s a Grexit or nothing.
That’s refreshing to hear from Hollande. His country, if Greece goes kaput, could be in line for its own Greek tragedy down the line. You would think he’d be a supporter of any last gasp measure to prevent a Grexit.
Ministers from Germany are equally lukewarm on the proposal. If Chancellor Merkel is anything to go by, the plan would face an uphill battle.
Last week she indicated that any future bailout discussions would be ‘tough’. Not only that, but Merkel suggested ‘there will be no agreement at any price’.
Merkel’s words would seem to reflect the stance that German banks will take. It doesn’t make sense for Greece’s creditors to follow through on any five year timeouts. That’s because any such proposal would have to ease the burdens on Greece. And it’s unclear whether sweeping privatisations would be enough to offset debt obligations.
Would German banks take ownership of these assets? If not, it seems unlikely they’d sign off on the proposal.
At the same time, a corporate takeover of Greece could work out nicely for creditors, in theory. By 2020 Greece may not own much of its own infrastructure anymore. That would certainly reduce its ability to play hard ball over any bailouts.
It’s as if they want Greece to stay put while corporations buy up the country. Good luck trying to convince Greeks to go along with that.
Anyway, it will be interesting to see what German banks think of the idea. They provide a large portion of liquidity to Greek banks. The decision to allow such a plan may rest on their shoulders.
Of course, this all assumes that Greece is on board with the idea too.
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Did the referendum solve anything?
The Greek referendum was supposed to set the stage for a final conclusion to the drama. As yet, it’s done nothing of the sort.
Yet again, Greece is sitting around waiting for a bailout. Yet again, the Eurozone leaders want pension and wage reforms.
The situation still demands Greece to push through new legislation covering taxes and pensions by Wednesday.
How is this any different to the circumstances of a month ago? It isn’t. And the outcome isn’t likely to change either.
The Greek people voted no to the bailout terms. Are we supposed to believe the government will now renege on their promises? It would be some backflip to now agree to the strict bailout terms. And it would be even more optimistic for them to cobble together a plan within two days.
Even if they did, it will still need approval from the EU parliament. That’s necessary for any bailout talks to resume. At the earliest, it’d still be weeks before any agreement is reached. But Greece doesn’t have that much time.
Greece still has upcoming debt obligations to service. They have a 20 July deadline set for a US$7 billion repayment to the ECB. By mid-August, Greece also has another US$12 billion repayment due to creditors.
Yet there’s no guarantee that Greece will remain solvent even until the end of this week. Banks have remained closed for a fortnight now, with ATM withdrawals rationed. The Greek economy, for all intents and purposes, is running on empty.
That’s why they’re now asking for a temporary loan to keep the economy functioning this week. The EU may agree to this if Greece shows a commitment to painful reforms. But it won’t. We’ve been past all this before. There’s even less political will to make cuts post-referendum.
That means the 20 July deadline will force the ECB’s hand. They’ll have no choice but to cut emergency funds. If it’s not already, Greece will certainly be bankrupt if it cannot meet bond redemptions by Monday next week.
None of this suggests the five year timeout idea is feasible. The situation is now past the point of desperation. But with no side likely to concede ground, a Grexit remains the most likely outcome.
After all, Greece doesn’t need a timeout. It needs an expulsion.
Contributor, The Daily Reckoning
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