David Marsh: With Tsipras Back in Power, Greek Drama Has a Long Way to Run

2015-09-21 IMI

The Official Monetary and Financial Institutions Forum (OMFIF) is a global financial think tank headquartered in London. David Marsh: Managing Director, Official Monetary and Financial Institutions Forum (OMFIF) This was an election no one appeared very eager to win. Now the real struggle starts. Of all the possible outcomes, Sunday’s renewed victory by Alexis Tsipras’s left-wing Syriza party, ushering in another Greek coalition to enact the country’s newly agreed €86 billion bailout package, offers the best chance of relative stability in coming months. Unfortunately, the chances of any kind of enduring stability are not that high. But Greece’s weakness is its strength. Tsipras now goes to the helm of a dream-like battery of improbable, can’t-quite-believe-I-got-here European left-wing leaders (including Britain’s new hard-left opposition Labour helmsman Jeremy Corbyn). Greece’s parlous political and economic position delivers precisely the reason why Tsipras will, true to form, be using fears of Greek instability to drive hard bargains with creditors — and why (led by Germany and France with varying degrees of enthusiasm and distaste) they will succumb. New Democracy, the conservative opposition party that headed the Athens government until the January poll that brought Syriza to power, didn’t want to win the latest election. It preferred that the left stay in office to reap the bitter fruit of presiding over fresh belt-tightening and unpopular reforms. Amid plentiful psychological sparring, in the autumn-winter creditor versus debtor campaign starting in Europe, we will see four sets of people operating through gritted teeth as they take up their position around negotiating tables. In one corner sits Tsipras, whose party won around 36% of the votes on Sunday against 28% for New Democracy. The Syriza chief is a reluctant convert to the spending cuts, tax rises and market liberalization demanded by creditors in the August bailout deal. Mindful of the Greek electorate’s ringing “No” to creditor-inspired austerity in the July 5 referendum, Tsipras may well interpret his new mandate — achieved with a higher majority than the latest opinion polls had been suggesting — as a signal that he can take a tough line with creditors over the bailout details. Large parts have not been fully agreed, let alone implemented. Facing the Greek debtors are the creditor countries — a diverse grouping indeed. Germany is on the defensive. Finance Minister Wolfgang Schaeuble played a high-stakes game during the summer in calling for a “temporary” (Eurospeak for “semi-permanent”) Greek exit from the euro EURUSD, +0.1413% , but has had — for the moment at least — to retreat. Germany’s habitually orthodox line on budget cuts is in disarray, hard hit by the effects of the world economic slowdown and the European migration crisis. Italy and France, waging long-standing, not-so-covert guerrilla warfare against German rigor, will be using Tspiras’s strengthened position as a means of reining back their own deficit-reduction commitments. In Greece itself, New Democracy will take a pro-European line in Parliament. Yet no one should be under any illusions that the opposition fully backs the creditors’ position. Greece’s creditor-imposed economic program started to fall apart as long ago as summer 2014, months before Syriza came to power. In a third corner we see the European Central Bank, likely to adopt an exacting stance on Greece’s fulfillment of budgetary commitments in return for bringing the country into the bank’s €60 billion-a-month program of eurozone (apart from Greece) asset purchases under the quantitative easing measures started in March. Especially in view of the ECB’s increasingly probable continuation of bond-buying beyond September 2016, this would be the big prize: both for the Syriza government craving the enhanced status of “no-pariah” positioning on world capital markets, and for investors who have taken risky but potentially rewarding engagements in Greek bonds in recent months. As always, the ECB is in an awkward position. On the one hand, there would be considerable logic in the bank transferring to the taxpayer-backed European Stability Mechanism its remaining holdings of Greek bonds acquired under the “securities market program” that started in May 2010. On the other hand, as ever under the beady eye of the Bundesbank and a skeptical German public, it may soon start acquiring new sets of Greek assets under a revamped QE program — almost certainly leading to fresh conflicts of interest. In the fourth corner, possibly as overall arbiter of the outcome, is the International Monetary Fund. It will participate in the latest bailout package only if the creditors agree to substantial debt relief for Greece in coming months, through fresh cuts in (already low) interest rates and a stretching out of repayments until late in the 21st century. In view of the disruption caused by the election, a planned October review of Greece’s progress under the August package will have to be postponed. Greece, backed to a certain extent by the IMF, wishes debt relief up front, as a condition for reform and then the delivery of the primary budget surpluses the creditors demand. Germany and the other creditor hardliners wish to see reforms enacted first, and then primary surpluses, as a condition for debt relief later on. Many tussles await German Chancellor Angela Merkel and her finance minister. Greece and its backers are hoping that unfavorable economic news from China and emerging markets, together with uncertainties over U.S. monetary tightening and a continuation of the refugee crisis, will concentrate German minds and push Berlin towards substantial debt relief to avoid further euro unrest — even though Greece will be less-than-compliant with all elements of the August deal. This looks suspiciously like earlier episodes in Greece’s debt saga. The Greek imbroglio has a long way further to run.

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David Marsh: With Tsipras Back in Power, Greek Drama Has a Long Way to Run

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