Tuesday, May 05, 2015

Negotiations over Greece's future continue

Antonio Fatas in The Greek Dra(ch)ma is back? On the Global Economy 05/03/2015 sizes up the current positions of the two sides in the Greek negotiations. For Greece:

What Greece really wants out of these negotiations is straightforward: a restructuring/reduction of its current debt that allows them to survive over the coming years with a primary balance in (small) surplus. This would mean that their pressure is gone and and that they can implement any policies they want without worrying about new loans as long as they can keep a primary surplus, which might be feasible given the current state of the budget. In return it will be easy to promise reforms that can have enough support at home (removing bureaucratic barriers, broadening the tax base, improve government efficiency). Of course, when it come to the actual implementation of those reforms, the support could turn into strong opposition. Greece also does not want to leave the Euro. Support among Greek voters is very high and the government understands the uncertainty and likely downside risk that they would face if Greece has exit the Euro area. [my emphasis]
On the Germany/EU side:

What the European partners want is much less clear. They would love to get paid back on all the current Greek government debt that they hold but that's unlikely to happen. Some would love to see Greece outside of the Euro area so that they do not have to deal with this again. There is a sense that whatever agreement is found now will not be the last one. The lack of trust has reached levels that has made it clear to some that Grexit is the best long-term outcome. But they are afraid of the consequences, both in the short run and in the long run in terms of credibility of the membership that would be left after Greece was gone. What no one wants is an agreement that does not offer a permanent solution to the problem. But is this possible? You need a credible commitment from Greece on implementing reforms in a way that can guarantee a large enough primary balance so that the possibility of future crisis goes down significantly. But credible commitment on reforms is not feasible. Reforms take time to be designed and implemented and there is enough uncertainty about growth and interest rates to ensure that a future crisis can be ruled out. [my emphasis]
The clock is ticking and we're going to have some kind of turning point in Greece's situation. The news leaks and stories about various conflicting options are a combination of actual differences in positions, negotiating bluffs and trial balloons to see how others react to various options. The big question in the latter category is how various players would react to Germany insisting on expelling Greece from the eurozone.

Mohamed El-Erian, formerly of PIMCO and now Chief Economic Adviser at Allianz, has nice things to say about Greek Finance Minister Yanis Varoufakis in Varoufakis should be heard Ekathimerini 05/04/2015:

Having spent the bulk of his career in academia, Varoufakis erred toward open public discussion and discourse. Diplomatic niceties were set aside in favor of candid debates. Flowery introductions gave way to laser-like focus on areas of disagreements.

Having also been part of a government that was elected on the promise to restoring Greece's dignity, he had no hesitation about speaking to other European finance ministers as an equal. And because his meetings were closely covered by the media -- in particular those with his German counterparts -- the world was often treated to a level of drama that hardly ever emerges from European negotiations: accusations and counter-accusations, rebukes and unusual physical postures.

Varoufakis is impatient, and understandably so. Having observed the suffering of his people for so many years because of what he believes were unguided policies, he was ready to shake things up. Yet in his keenness to deliver a big bang solution, he neglected the small confidence-building steps that were required.
Varoufakis, after a break of a couple of weeks from his role as lead negotiator, will be back in the saddle at a new round of meeting with the eurozone finance ministers next week.

Finally, Bloomberg News has a really good interview with Daniela Schwarzer of the German Marshall Fund on the Greek situation, No German Majority to Push Greece Out of Euro: Schwarzer 05/04/2015.

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