Greece – a deal to be done?

February 3, 2015

Greek PM Tsipras attends a memorial ceremony at the Imprisoned Graves in Nicosia

Greek Prime Minister Alexis Tsipras will visit Rome for talks with Italy’s Matteo Renzi and will be met there by his finance minister, Yanis Varoufakis, who has already been to London and Paris to try the scope for a new debt deal for Greece and reassure investors that there won’t be a default.

On the need to end, or at least curb, austerity and focus on ways to galvanise growth, the left-wing Greek premier will find an ally in Renzi.

But writing off any significant amount of Greek debt it is a different matter, and that is the most pressing issue for Athens with its bailout programme expiring at the end of the month and Varoufakis having declared he has no interest in renewing or extending it.

Syriza’s first week in power suggested it was pretty implacable about abandoning austerity and renegotiating the country’s debt pile.

But already things appear to be on the move. In London yesterday, Varoufakis appeared to drop calls for a write-off of Greece’s foreign debt. Instead, sources close to him talked of switching into perpetual bonds or debt linked to economic growth levels.

The idea seems to be avoid any talk of a write-off or haircut and sparing the remaining private creditors any further pain in an attempt to win the markets back onside. Whether that is sellable to Athens’ euro zone peers remains to be seen.

Varoufakis had not discussed the swap with EU or European Central Bank creditors, said one source, who had direct knowledge of the plans. The finance minister said he had not put a value on the swap, the source said.

The euro zone position hasn’t shifted – Greece could be given more time to pay off its debt if it keeps its budget in balance and maintains promised reforms but the debt will not be written off.

At the Reuters euro zone summit, German Finance Minister Wolfgang Schaeuble repeated his hard line on Greece and said German public support for the euro was dwindling worryingly due to the Greek crisis and the ECB’s decision to buy a trillion euros of government bonds.

Greek sources are also talking about a programme to reform the Greek economy. By focusing on structural economic reforms and making tax gathering more efficient, that could be put together in a plausible package while allowing Tsipras room to dismantle some of the harsher austerity measures imposed under the country’s bailout.

Greece is tasked with running a hefty primary budget surplus and could be allowed to eat into that a little.

In the end, both sides are going to have to move to reach an accord but the fact that the Tsipras government already appears to be moving suggests a deal will be done.

If sketched out in outline by the time the bailout expires at the end of the month, the euro zone and ECB would surely keep funding the government and its banks to buy time for a more comprehensive agreement.

The overwhelming majority of Greeks want to stay in the euro zone, a fact Tsipras is well aware of, and while the currency bloc’s leaders think there are now strong defences in place to protect the rest of them from Greek chaos, the political damage of allowing a member state to leave the euro, thus wrecking the concept of “irreversibility” in the monetary union, is too dangerous to contemplate.

There could also be room for manoeuvre on the drive to cut debt across the euro zone rather than foster growth.

Paris and Rome have been pressing for such a shift, European Commision President Jean-Claude Juncker has been touting an EU investment plan, though it is overwhelmingly reliant on private money, and there is still talk of a Franco-German plan whereby France would up the pace of economic reform in return for Germany – having balanced its budget a year before it expected to – spending a little more.

A summit of EU leaders at the end of next week will give a guide as to whether there is any shift afoot. If it happens, Tsipras can claim not just to have changed Greece’s future but shifted Europe’s path too, potentially giving him cover for a deal on debt which will be far more nuanced than the one he promised on the campaign trail.

With fighting raging again in eastern Ukraine and the West accusing Russia of giving over support to the rebels, the United States is reconsidering whether to provide weapons to Ukraine in its fight against Russian-backed separatists, senior administration officials said on Monday, though no decision has yet been made. U.S. President Barack Obama will host German Chancellor Angela Merkel at the White House next Monday.

Turkish inflation data will be key to the central bank’s decision on whether to hold an extraordinary monetary policy committee meeting this week. The governor has indicated a meeting to cut interest rates (after heavy government pressure to do so) could be held if inflation falls more than one percentage point and a Reuters poll indicates a fall bigger than that.

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