Since we last blogged about Greece a series of developments have taken place. Syriza was voted in Government on 25th of January, the new Greek Finance Minister Yanis Varoufakis has been touring Europe to amass support for Syriza’s plans and negotiations with the Eurogroup have commenced.
As expected, a power struggle has ensued between Greece and its creditors with both sides flexing their muscles. On the one side Greece is asking for debt restructuring and toning down of the austerity package while Eurozone finance ministers, led by German Finance Minister Wolfgang Schauble, are adamant that a deal can only be reached under current arrangements.
In the meantime, third parties – Barack Obama, George Osborne, Mark Carney and others – have weighed in on the debate to emphasise the critical importance of avoiding a ‘Grexit’.
What’s on the table:
- Negotations have focused on the first step – a temporary solution or a ‘bridging loan’ that replaces the current program – to ensure that Greece does not run out of money by the end of February which would precipitate default and a ‘Grexit’.
- The ‘bridging’ loan proposal involves a relaxation of conditionalities in the current program; such an agreement will allow a 6 month period to devise a new plan for Greece.
- So far, a series of Eurogroup meetings have not borne fruit on the ‘bridging loan’ deal.
- Germany remains unyielding that Greece should sign an extension of the current program – which attaches strict conditionalities on fiscal targets and austerity measures – to secure financing and avoid default.
- The Greek side has been insisting that it cannot accept the extension of the program as the Party has been elected on the mandate to discontinue it.
- In the meanwhile, markets have been hypersensitive to every development; bond, equity and currency markets are fluctuating on an hourly basis reacting to any signal from the Eurozone negotiations.
Where are we now?
- At the moment, the Greek proposal for extension has arrived in Brussels and an emergency Eurogroup has been called for Friday.
- First reports indicate some big concessions by the Greek government; Syriza is requesting an extension of the ‘Master Financial Assistance Facility Agreement’ (avoiding the ‘program extension’ language) under monitoring by the Troika (Commission, IMF, ECB) which was previously staunchly rejected.
- According to Reuters, Greece pledged to meet its financial obligations to all creditors, recognize the existing EU/IMF program as the legally binding framework and refrain from unilateral action that would undermine the fiscal targets.
- But the details of changes to the austerity program remain an uncertainty as is the exact target for the primary fiscal surplus; they appear to be the main ‘sticky’ points with Germany.
- Commision President Jean-Claude Juncker has welcomed Greek proposals as a positive sign; however Germany rejected Greece’s proposals sending markets back into panic mode.
Will a deal be reached?
It appears that the deal is still hanging by a thread. While it seemed that an agreement was within grasp, Germany rejected the Greek proposal, extending the uncertainty surrounding the future of Greece in the Eurozone. The majority of commentators saw the Greek proposal as a workable compromise and the Eurogroup meeting tomorrow should be telling. The Eurozone’s institutions will continue to play a ‘fire-fighting’ role but current developments seem to suggest that even if the 6-month deal is reached, the likelihood of a durable solution to the Greek problem is deteriorating by the day.