What’s happening in the Eurozone tonight...

Out of the talks between what was known as the Troika and the new Syriza government of Alexis Tsipras rumours are emerging. The rhetoric is that neither side is willing to budge and that the talks have not reached an agreement, but the whispers are that one is near.

Here is what we know:

1)    The ECB’s move last week to force Greece to rely on the emergency financing had the effect of shortening the timetable for these negotiations to conclude. Several news organisations are now reporting that money is leaving Greek banks at an ever quickening pace, bringing forward the time when they will need refinancing. The Troika imposed reforms forced the previous Greek government to hold some reserves but they are not likely to be that huge. As it stands the Greece could run out of money by the end of March.

2)    No one wants Greece to default. This means that the Greek government is unlikely to want to play this card in the negotiations. The Greek people are opposed to default and, even though default has a worse reputation than it deserves, it would bring immense hardship and the social unrest in the short term. What is more, it looks as though default may not be the nuclear weapon it may once have been. The fluctuations in the Greek markets have not been mirrored outside Greece, suggesting that the markets believe that other European economies are sufficiently insulated to withstand a Greek default. If Greece had defaulted in 2010 or 2011 it would have dragged the Eurozone down with it, not any longer.

3)    Greece wants a bridging package rather than a bailout extension, the Troika doesn’t. The bridging package would be designed to get Greece through the next six months whist a long-term solution was negotiated. Here Syriza may be playing on a loosing wicket, there seems to be no reason for the Troika to agree to a bridging package, the shorter the timetable the weaker the Greek governments negotiating position. In exchange for the bridging loan Tsipras has offered to the run a primary surplus of 2% (rather than the 4.5% demanded by the Troika) and to slow down the implementation of some of his manifesto.

It now looks like there will be an agreement. George Osborne said at the weekend that the Treasury is drawing up contingency plans for Grexit but this does not seem to have been mirrored in Germany, whose finance ministry are on record saying there is no possibility of Greece leaving the Euro. What will almost certainly happen is that there will be either a bailout extension which looks enough like a bridging agreement for Syriza to claim victory or a bridging loan which looks enough like a bailout extension for the Troika to claim that they have stood firm. Given the comparative strength of the negotiating positions the former looks more likely than the latter, although there is no guarantee that the activist core of Syriza would accept this. They may be the wild card in this which no one can control.

What the ECB did in the night

At 11pm Athens time the ECB went on the offensive. Having been slow to respond to the manoeuvres of Greek finance minister Yanis Varoufakis as he darted around Europe, the ECB finally came out with a meaningful, if not entirely unexpected, response. Varoufakis had stolen the momentum of the renewed Greek bailout debate when he announced that he would no longer recognise the Troika as the single entity but would deal with its constituent parts (the EU, the IMF and the ECB) separately. He then continued to control the debate by making various concessions around the extent to which the total debt burden should be reduced. The action last night (4^th February) is the ECB trying to seize the initiative in the wake of the Greek government getting a warmer hearing than anticipated in Paris and Rome.

So what has the ECB done? Essentially they have lifted a waiver on a credit rating rule which allows European banks to trade their junk loans for credit. Essentially the scheme allows banks to swap debt they will never get back for credit. Normally there is a minimum credit requirement to participate in the scheme, to keep bad banks out, however there was a waiver for Greek banks, which otherwise would not have made the grade and would have been excluded. The removal of this waiver means that from 11^th February Greek banks will not have access to the scheme.

Why does this matter? At the moment there is a high level of uncertainty about the Greek economy leading to a flow of money out of the already weak banks. At the moment these banks have access to capitalisation from the ECB which buys their bad debt. Come 11^th February this stops. If money continues to flow from the Greek banks the banks can either apply to the ECB through an emergency liquidity fund, a far more expensive way of accessing capital, or it can turn to the Greek Central Bank in Athens. If the Greek Central Bank cannot get money from ECB it will have to find its own methods of recapitalisation. This will involve Greece printing its own money, a new Drachma. The action by the ECB makes Greece being forced out of the Euro far more likely if a deal cannot be reached in near future.

Because the introduction of a new Greek currency will immediately be followed by its devaluation, making it impossible for Greece to service its debt, Greece leaving the Euro will result in it defaulting. This nuclear option is the strongest card in Syriza’s hand, but it is one that it is loathe to use. Greeks do not want to leave the Euro and the defaults and currency changes are rarely clean and never cheap. Default is good for neither side economically however the actions of the ECB raises serious questions about democracy within the EU and the Eurozone.

If the ECB forced Greece out of the Euro it would be an instance of a bureaucratic central bank overruling the expressed desire of a democratically elected government. Are we sure this is the sort of thing that we want to allow? In most nations the central bank is under the control of the government and even where it is independent, as in the UK, it would never knowingly act contrary to the interests of the country. The actions which the ECB took late at night were neither desired by the Greek people nor in their interests. Aside from anything else, removing liquidity from a fragile banking system is never likely to encourage economic recovery. The path that the ECB is threatening to go down has not been voted for the Greek people, or indeed the European people. The ECB has pursued a neo-liberal, pro-austerity dogma into an undemocratic and potentially quite nasty cul-d-sac.