It all seemed positive yesterday, as Germany blinked and was ready for another can kicking exercise, accepting only one Greek reform for the time being. But as we noted, the IMF is a hurdle. And indeed, the IMF delegation, that officially “never leaves the table”, just did it and put all the blame on Greece.
The IMF news came 10 minutes after the Athens stock market closed 8% higher on the optimism about a happy end. Everything seems darker now. It’s not only the IMF. Also other European officials, Juncker and Tusk, urged a compromise from the Greek side and made it clear that this is a “last throw of the dice”. Pressure seems to be mounting on Greece to accept the June 3rd proposal which it publicly rejected. But is the pressure really on Greece? Here is why Greece has leverage over all the three sides of the troika:
- ECB: Mario Draghi’s institution owns the printing machine, so there’s no money to really lose, but it does have a lot of credibility at stake. The ECB has been practically supporting a Greek bank run: Wednesday after Wednesday, they have enlarged the Emergency Liquidity Assistance (ELA) to Greek banks, bringing it to €83 billion. The Greek banks are not in a good situation. The ECB has the impossible dilemma: if can either throw more money or cut its losses. At this point, the losses are huge. Upon a Grexit, Greek banks will likely collapse and the ECB will be in emergency mode.
- IMF: The IMF has already seen Greece delay a payment, using the “bundling” option last used by Zambia in the 80s. If Greece doesn’t get fresh IMF/EU/ECB money, Greece will default on it, and that’s trouble for the IMF. As the US is the biggest shareholder of the IMF and this country doesn’t want Greece looking to Russia for help, the IMF could change course, but this is less likely. The IMF seems to look for an exit. And that puts the pressure on Merkel.
- EU: The European Union is basically led by Germany. Merkel has shown flexibility in the past and knows how to calculate political risk. Upon a Grexit, her Greek policy in the past 5 years will go down the drain, and so will taxpayer money. So far, the German taxpayer only guaranteed loans to Greece. On a Grexit and devaluation of the drachma, the money is gone. Isn’t it better to cut a deal, even without the IMF?
All in all, the stakes are currently much higher for all creditors than they were beforehand. Throwing good money after bad seems to the better option than letting it all explode.
What do you think?
June 18th is now the new date in which leaders convene and this is marked as the final deadline before the bailout expires on June 30th, the day that Greece has to pay the IMF its “bundled” €1.5 billion.
Will Greece break down as creditors want it to? Or will Tsipras continue smiling, eventually praising Merkel for her courage?
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