Varoufakis enters the lion’s den

February 11, 2015

Greek Finance Minister Varoufakis holds his speech notes before a vote of confidence at the parliament in Athens

Greek Finance Minister Yanis Varoufakis enters the lion’s den today, attending his first meeting of euro zone finance ministers where he will spell out his plan to drop his country’s bailout and end austerity.

He will seek a “bridge agreement” to buy time until June for a full settlement. Greece’s new government wants the right to issue more short-term debt beyond a 15 billion euro threshold. It also wants to get its hands on 1.9 billion euros in profits from Greek bonds held by the ECB and other euro zone authorities.

That would give it some breathing space but there are several reasons why the euro zone may not accept that.
More generally, Athens is pushing for a new programme which will focus on structural economic reform rather than austerity with the OECD rather than the troika overseeing the process.

That is cunning and taps into a wider debate in the euro zone about doing the same thing. Greece is tasked with running a primary budget surplus of 3 percent of GDP this year and wants to halve that to allow for more spending.

Nonetheless, Varoufakis can expect a rough ride and it’s unlikely that any deal will be done tonight. German Finance Minister Wolfgang Schaeuble said after a meeting of G20 finance ministers in Istanbul that if Greece did not want a new aid programme “then that’s it”, adding that he expected to hear something binding from Athens on Wednesday.

That sounds pretty uncompromising and Athens has no obvious allies. A meeting of euro zone officials which prepares the ground for Eurogroup meetings pitted 18 countries against 1, according to one participant. The likes of Portugal and Spain are just as opposed to a Greek debt restructuring as the northern Europeans led by Germany are.

Prime Minister Alexis Tsipras comfortably won a confidence vote last night and promised  parliament he would not cave in to demands to extend the deeply unpopular bailout “no matter how much” Schaeuble asked for it. Varoufakis said he was not seeking a clash but that you could not negotiate by ruling one out.

The smart money is on some sort of extension to the bailout, even if it is called something else to soothe Greek pride, to allow more time for substantive negotiations.

But it could clearly go horribly wrong not least because the wider euro zone no longer fears a wave of destabilizing contagion if Greece headed for the exit door. Whether they are right not to do so, remains to be seen.

A summit of EU leaders follows on Thursday and the Eurogroup meets again next Monday. It might not be until that last meeting that the fog begins to clear. There is economic logic in easing up on austerity to galvanise growth, increase the tax base and thereby cut debt but there is no question of writing off Greece’s debts.

OECD Chief Angel Gurria is expected in Athens for talks today. It will be interesting to see if he is amenable to overseeing Greek reforms.

Adding to the uncompromising rhetoric, Defence Minister Panos Kammenos said Greece could look to Russia or China if it failed to get a new debt deal with the euro zone. Greek Foreign Minister Nikos Kotzias is due to meet Russian Foreign Minister Sergei Lavrov in Moscow today.

Portugal offers up to 1.25 billion euros in 10-year government bonds to take advantage of yields near record lows in the secondary market, which indicates the lack of investor concern about Greece’s standoff infecting other euro zone countries.

The leaders of Russia, Ukraine, Germany and France meet in Minsk to try and broker a durable ceasefire in eastern Ukraine where rockets killed more than 10 civilians and soldiers on Tuesday. The death toll has now breached 5,000.

European officials said it was difficult to imagine Russian-backed rebels agreeing to return to earlier positions after weeks during which they have advanced relentlessly.

French Foreign Minister Laurent Fabius listed the future status of Ukraine’s eastern regions, the mechanism for guaranteeing the integrity of Ukraine’s borders and ceasefire terms as among the issues still unresolved in lower level preparatory talks.

The war has nearly bankrupted Ukraine. We reported exclusively yesterday that talks are underway to increase aid to the country to something like $40 billion, a figure that would include the agreed $17 billion IMF package. However, there is hesitancy giving the ongoing conflict and Kiev’s poor track record on seeing through previous IMF programmes.

President Barack Obama is considering whether to send arms to Kiev. Germany, and most of the EU, is against the idea fearing it will just inflame the conflict.

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