Nick Beams
The “debt swap” menu proposed by Greek Finance Minister Yanis
Varoufakis during his tour of European capitals this week has two
central objectives.
It is aimed at ensuring that there is a continuous flow of money out
of Greece, stretching into the indefinite future, in repayment of its
€315 billion foreign debt, while at the same time giving some breathing
space for the new government and creating the illusion that it has won
some genuine concessions from the European banks.
Vourafakis’s plan followed the repudiation of the central plank of
the program on which it was elected to government just two weeks ago—the
writing off of the greater part of the public debt. Recognising that
such a “hair cut” would not be accepted, Vourafakis crafted his
proposals accordingly.
He proposed that Greek bonds owned by the European Central Bank be
converted into perpetual bonds. Normally a bond stipulates that the
issuer will redeem its face value at the end of its term. If the
existing bonds were made perpetual they would never be redeemed and the
Greek government would continue to pay interest on them indefinitely.
This would have the effect of writing down the value of the debt owed by
the Greek government, though in practice it would make little
difference because the existing bonds are long term, extending over more
than 30 years.
The other proposal was that interest payments on bonds held by
European governments would be indexed to nominal economic growth. That
is, if Greek growth increased, the payments would increase, and they
would decline as growth fell.
Vourafakis also proposed that the stipulation that Greece should run a
budget surplus, after interest payments, should be reduced from 4
percent of gross domestic product to between 1 and 1.5 percent. He
insisted this requirement would be met even if it meant the Syriza
government would not meet many of the public spending promises on which
it was elected.
The proposals won initial support, with the Financial Times
commenting in an editorial that as Vourafakis sought support for the new
deal he deserved “a full and even sympathetic hearing.”
The Financial Times also indicated that, as most of
the Greek debt is owed to other European governments, Vourafakis’s
insistence that he talk directly to those governments, rather than to
the troika—compromising the European Commission, the European Central
Bank and the International Monetary Fund—may have some merit. It seems
the Financial Times is of the belief that a Syriza government
may be the best instrument for breaking up the power of the Greek
oligarchs and opening up lucrative sections of its economy to access by
international financial institutions.
But after winning some initial expressions of support, Vourafakis’s
mission suffered a significant setback on Wednesday when the European
Central Bank intervened.
Having, at least nominally, repudiated the existing bailout terms,
the Syriza-led government is seeking €10 billion in “bridging” finance
while a new agreement is worked out over the next three months.
However, the ECB put a spoke in its wheel when it withdrew the waiver
on the use of Greek government bonds held by Greek banks as collateral
for loans it provides.
Under its rules, the ECB should not accept Greek bonds as collateral
as they are of sub-investment grade, essentially junk-rated. But the ECB
had agreed to waive that stipulation, provided the Greek government
remained compliant with the terms put in place by the troika. With the
decision of the government to withdraw from that agreement, the ECB
announced that it was ending the waiver.
The issue would have come up anyway at the end of the month, when the
present agreement was due to run out. This would have required
agreement for an extension which the Greek government has said it will
not seek. Wednesday’s ECB decision has served to speed up the
confrontation.
In its statement, the ECB said it had taken the decision “in line
with existing Eurosystem rules since it is currently not possible to
assume a successful conclusion of the program review.” However, it said
that Greek banks would still be able to obtain funds from the country’s
central bank “by means of emergency liquidity assistance (ELA) within
the existing Eurosystem rules.”
The decision, while not completely undermining the Greek banks, has,
nevertheless, dealt them a major blow because it has reduced the
collateral they have available when seeking loans from the ECB.
Consequently, shares fell sharply after the decision was announced.
The Greek banks are facing growing liquidity problems because of
significant cash withdrawals in the recent period. According to a report
in the Economist magazine, some €4.4 billion was withdrawn in December and more than double that amount in January.
Much of this money consists of funds being taken offshore by
financial oligarchs seeking a “safe haven” in case capital controls or
other government restrictions are imposed. Some of them will also have
made the calculation that if the crisis deepens and Greece withdraws
from the euro zone, they will be able to use offshore funds to pick up
lucrative assets. These would be at rock-bottom prices as a result of
the severe devaluation of a reinstated drachma as the national currency.
While the Greek banks will still have access to liquidity through the
country’s central bank under the terms of the ELA, the ECB move is a
significant tightening of its grip both on the Syriza-led government and
the national banking system.
The ECB has the power both to determine the amount of ELA and can decide to withdraw it completely.
As the Economist noted, the “Greek banks’ growing dependence
on ELA leaves the government at the ECB’s mercy as it tries to
renegotiate the bailout.”
It also pointed out that the ECB has taken action previously. In
2013, the ECB announced that it would stop the authorisation of ELA to
Cypriot banks within days unless the government agreed to its bailout
terms, forcing it to accept. A similar threat was used to get agreement
from the Irish government in 2010.
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