The summit between Greece and its creditors has failed, after the former presented a quasiultimatum proposal on Wednesday, rejected by Athens. A counterproposal is now expected from the Greek government, which has an increasingly limited leeway. Tension is mounting within Syriza, as also the risk of financial collapse…
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The ECB has let on that government bond purchases may be modulated based on needs: an option that could prove useful if negotiations with Greece fall through. On the other hand, Draghi has warned that the ECB does not intend to react to market volatility.
Negotiations with Greece are in the final stages, and for the time being seem more likely to end in a shock to the system rather than in a handshake. Creditors presented their proposal at a summit with the President of the EU Commission, the President of Eurogroup, and the Greek prime minister. The terms of the document, leaked to the Web in the past few days, seem stricter than those proposed to Samaras in 2014: despite the easing of fiscal objectives, the blow administered to the Greek economy by the political crisis and Syriza’s rise to office has only made the inertial situation of national accounts worse, so that (based on creditors’ calculations) a target of 1.0% for the primary balance implies the implementation of corrective measures worth a hefty 1.7% of GDP in 2Q 2015. The Greek had proposed a 0.6% correction in 2015, which would in any case imply the adoption of corrective measures worth 1.3% of GDP. Although the worsening of national accounts is the result of the flawed policies adopted in the past months, overly strict fiscal goals risk making prospects even worse. As regards the measures, Athens proposed corrective interventions worth 1.7 billion euros, most of which generated by an extraordinary tax on earnings in 2014, plus the revenue generated by the reform of indirect taxes. On this front, distances do not seem impossible to bridge. In exchange for the measures, creditors have also offered to use part of the funds for the recapitalisation of banks to cover debt reaching maturity in the next few months, whichwould win more time to find a structural solution. On the other hand, there is still no openness towards debt restructuring plans, as Greece keeps proposing. Nor have the “red lines” on pensions and wage negotiations set by the Greek been guaranteed by lenders.
Obviously, the creditors’ proposal has been rejected by the Athens government, which will report to Parliament this evening. Creditors now expect a counterproposal more in line with their terms, but this may only come next week. The lengthening of negotiations is reflected by the decision to group the four payments due to the IMF this month in a single 1.6 billion euro instalment to be paid on 30. This decision is not without risk, as it could raise the level of concern among the Greeks and accelerate the outflow of deposits from the banking system.
The lack of tangible results is weakening Tsipras’s position within Syriza, where the internal minority is restless, and may erode the popular consensus the government still enjoys. In Parliament, any agreement would probably be voted by the pro-Europe minorities; however, the stalling of negotiations could add support to the positions of the minority, in favour of an abandonment of the talks, which would push the party to take disastrous decisions for the country. Some members, including one minister, have prospected the possibility of new elections – which, however, risk not contributing at all to solving the crisis.
The meeting of the ECB’s governing council was another non-event, as would be expected in the present phase. Only two aspects were of interest. First, Draghi showed openness to raising the monthly purchases target if needed, i.e. in the event of negotiations with Greece evolving negatively; this offers hope that the central bank will react negatively to symptoms of contagion. Second, the ECB does not intend to react to volatility on the financial markets, and the markets should be prepared for this. Draghi specified that he does not believe that zero rates and non-standard monetary policy measures are a cause of systemic risk; in any case, this kind of risk will have to be managed by means of macro-prudential measures.
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