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Article / 21 May 2016 at 10:00 GMT

The Game over Greece – nobody wins, everybody loses

Blogger / MoreLiver's Daily
  • Europe wants more muddle-through, and will get it
  • The IMF's siding with Greece and the threat to EU is a blank gun 
  • If the IMF exits the game becomes pure gambling
By Juhani Huopainen

I was invited to speak to members of the Finnish parliament on Greece this week. The European finance ministers meet next week (May 24, 2016) to conclude the first review of the 2015 bailout, and I tried to provide a fresh perspective on the situation.

The Greek crisis and its (mis)management is easier to understand when it is viewed as a political game. Understanding the interaction between the game’s participants (their motives and limits) and the event calendar is key.

The participants:
  • Greece
  • The International Monetary Fund
  • The European Commission
  • The European Central Bank
  • Individual Euro countries (core and PIIGS)

The events:
  • Eurogroup May 24, 2016
  • Brexit referendum June 23, 2016
  • Spain elections June 26, 2016
  • Greece bond maturity to ECB July 20, 2016
  • France elections latest May 2017
  • Germany elections latest October 2017
  • The second stage of the ”Five President’s Report July 2017-
  • Italy elections latest May 2018

Greece: having to pay with no money of its own
The overriding key event is the bond maturity on June 23. Greece will have to pay EUR 2.4 billion to the ECB and the national central banks of the Eurozone (NCB). It doesn’t have the money, so the only way to get the payment in time is by concluding the bailout review, which has to be done before the next bailout tranche can be paid to Greece. 

In effect, the euro area is lending money to Greece so Greece can pay back its previous debt. A roll-over of sorts, and as no new money changes hands, the review is pure political circus.

International Monetary Fund: does not want to pretend anymore

The International Monetary Fund is not happy. In 2010, it caved in to the political pressure and lied that Greece’s debt is sustainable. In 2013 it admitted that it had “failed to realise” that austerity would be counter-productive and that the fund had broken its own rules.

In 2015 the IMF said “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

In 2016 the IMF has gone further and says Greece needs debt moratorium until 2040.
The IMF is in taking Greece’s side in the game. I would go further and say that the IMF has always been on the Greek side, but in the early days of the crisis it caved in to the political pressure coming from the euro area’s national leaders and the European Commission.

Germany: hardline for political reasons
Germany is easy to predict: its opinions are governed by these curves:
German poll
 Chart source: Wikipedia

The curve says the support for the CDU- and SPD, the two current coalition parties, is collapsing. Part of it is due to the migration crisis, part of it is the euro crisis. Germany is also a euro crisis country. Germany lend the bailout money, and it knows it will not get all of it back.

Germany opposes debt relief, and lately has been also opposing the ECB's asset purchases and low interest rates. The purchases are seen to be risk mutualization (true) and the low interest rates are hurting the German banks (true).

Germany opposes every solution except more pretending and more muddle-through. It knows that Greece’s debt is unsustainable and that the monetary union must move toward a closer union – but knows there is no popular support of debt relief or integration. So it chooses to pretend.


Source: Author

European Central Bank: willing to play along
The European Central Bank is a big debtor of Greece: the original SMP-bond purchases, usual financing operations of the banks and ELA-financing. Greece is not included in the ECB’s bond purchase programme.

All that the ECB wants is to make sure that Greece pays its debts to the ECB. If angry voters in the core country would begin to see the ECB as a “bad bank” that loses the richer countries funds, the opposition to unconventional monetary policy could become acute.

The ECB would not be able to conduct monetary policy, because “whatever it takes” would not be deemed to be credible anymore. It would also kill the ECB’s ability to circumvent the prohibition to backstop the member countries. The ECB knows it is of little use unless it can act as a backstop.

The ECB would also like to see all the countries get along well enough so that further federalization of the monetary union would be able to proceed.

The ECB is more than happy to play along as long as the above is met. A clear signal was Draghi’s public and semi-friendly reminder to Greece’s ex-finance minister Yanis Varoufakis that he should not claim his country is bankrupt – because the ECB cannot accept bonds of a bankrupt country as collateral. Wink, wink.

European Commission: "Give us the powers"
The European Commission is scared of Britain’s referendum in June. If Greece would get a debt relief, it would increase the support for “Leave”. If Greece would default on its payment in July, it would increase the support for “Leave”. A debt relief could increase the support of the leftists in Spain’s upcoming elections, as they would also want it. A Greek default would also cost Spain, which would increase the support of euroskeptics.

Above all, the Commission wants closer integration - a powergrab or much-needed and still-missing element of a monetary union. Finding support for it would be impossible if Greece defaults and creates realized losses for the other euro countries.


Source: Author

The result: more of the same!
All the parties want things to proceed smoothly. The most obvious result will be a compromise where Greece passes the review, gets a bailout loan and pays back its maturing debt to the European central banks. Then the game continues for a while – maybe even years, but probably not a full decade. There are two possible show-stoppers for the muddle-through: Greece and the IMF.

Greece could strike back
Greece seems to have capitulated completely, but as long as it has the IMF on its side, it could still find leverage from Europe’s migration crisis. If the EU’s deal with Turkey fails, Greece becomes Europe’s first external border again. Then Greece could do what Turkey has done – present demands. This is the danger of the muddle-through strategy – take matters to the brink too many times, and at some point, someone will fall.

IMF’s threat would turn the Greek game into degenerate gambling
The IMF sees the grouping of important events as an opportunity to blackmail the EU with its demands for debt Greek relief. The IMF’s threat is that it will not participate in the bailout without a debt relief.

Either the IMF caves in at the last minute, or the EU will simply buy the IMF out of the process. That would be a shame, since the IMF is now probably the most honest participant in this game. Losing the IMF would not only kick out plenty of economic expertise, but also the little bit of honesty that is still floating in the process. Perhaps Europe is a place that cannot handle neither economics nor honesty. That is not gaming, but gambling.

These three articles of mine from 2015 are to a large extent still valid:
It's decision time on Greece
Worst-case Greece scenario is tolerable, so be bullish
Contagion from Greece: don't worry - yet

-- Edited by Clemens Bomsdorf
Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform
21 May
Juhani Huopainen Juhani Huopainen
The headline came from the slogan of a very nice computer game "Defcon":
"It's Global Thermonuclear War, and nobody wins. But maybe - just maybe - you can lose the least."
22 May
JulioCésar JulioCésar
Congratulations for your excellent article, Mr. Houpainen.

It is a nice summary on why nothing will really happen next week, other than pretend and extend. Irreversible decisions were made long ago and now the EU cannot possible walk away, the IMF and the ECB both want to get out of this mess as soon as possible and Greece seem to be making its best possible efforts not to right its many wrongs.

Best regards,
22 May
Juhani Huopainen Juhani Huopainen
Thank you.
22 May
Michael O'Neill Michael O'Neill
Excellent article. It deftly sumarizes a complex situation and makes the issues easier to understand.
22 May
Juhani Huopainen Juhani Huopainen
It appears that during the G7 some sort of understanding was found on buying the IMF out.

More on this on FT:
"Greece’s international creditors are discussing a plan to drastically scale back the International Monetary Fund’s exposure to the country, potentially through an EU buyout of up to €14bn in IMF bailout loans."
23 May
Marcus Antonius Marcus Antonius
Excellent summary.

I don't think the IMF is on Greece's side. It's problematic enough for them to say "oops, we didn't know that austerity measures will cause further slowdown". They'd offer relief in exchange for additional assets -- nothing new there, let the country bleed and get hold of its resources. It's just that unconditional continued support would be hard to justify.

But whichever way you look at it, the IMF just doesn't share the Eurozone's and ECB's objectives. The key point is that any new deal with the IMF can be understood by everybody, unlike the complicated emergency fund mechanisms. So people might actually understand what's going on.

Increasing VAT is a ridiculously helpless measure for everyone to see.

Honesty doesn't pay in this environment.

How is all this supposed to last?


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