Greek coalition braces for debt showdown as Germany rattles sabre
Markets have yet to grasp that the rift between EU creditors and Greece's firebrand premier Alexis Tspiras is 'so large as to be unbridgeable', warns Nomura
By Ambrose Evans-Pritchard, International Business Editor
8:46PM GMT 26 Jan 2015
The new Greece of Alexis Tsipras will run out of money by early March. It will then face a series of escalating crunch points that will end in default and a return to the drachma unless it can reach a deal with EU creditors.
“There is only €1.9bn left in the cash kitty, and the government has spending costs of $2.5bn coming up. Somebody needs to lend the country money soon,” said Megan Greene, from Manulife Asset Management.
One banker with close ties to Greece said the crisis may come to a head much sooner. “If there is no bail-out extension, Greece faces a really serious crunch. The EU may give Tsipras an extra month but they are not going to let this drag on. Events will accelerate,” he said.
Mr Tsipras held out an olive branch to Germany and EU creditors after his landslide victory.
“There will neither be a catastrophic clash nor will kowtowing continue. We are fully aware that the Greek people haven’t given us carte blanche,” he said.
Yet his election campaign was one long vow to repudiate the austerity demands of the EU-IMF Troika from his “first day in office”, even as he insisted that Greece will not give up the euro.
He aims for grand debt conference modelled on the London accord in 1953 when past enemies scarred by war agreed to rebuild Europe on new foundations. Germany secured 50pc debt relief. That is what he wants for Greece.
Yet his demands drive a coach and horses through the Troika "Memorandum". Wolfgang Schäuble, Germany’s finance minister, said Greece is legally bound by its agreements. “There are rules, there are agreements. New elections change nothing,” he said.
Mr Tsipras’s decision to form a coalition with the right-wing ANEL, or Independent Greeks party - rather than the centrist Potami party - strongly suggests that he intends to force a showdown with the Troika. ANEL is a nationalist champion of the Greek Orthodox Church, opposed to immigration.
Credit: Open Europe
Party leader Panos Kammenos is virulently anti-German, describing his country as an occupied land under the austerity dictatorship of a Fourth Reich. “We will never drop to our knees to beg from Angela Merkel,” he said.
The only policy that ANEL has in common with Syriza is a shared zeal to annul much of the €245bn debt imposed upon the Greek state in a series of Troika loan packages that allowed German and French banks to dump their bonds on taxpayers.
Dimitris Drakopoulos, from Nomura, said the Syriza-ANEL coalition will be even more “confrontational” than if Syriza had won an outright majority. “We think the divergence of views with the Troika is so large as to be unbridgeable,” he said.
Mr Drakopoulos said the markets will have to “reprice the risk of an ultimate confrontation with Europe” even if Syriza is forced to back down in the end. “The eurozone is not going to play ball with Tsipras. He has very little leverage,” he said.
Germany is already smarting over its defeat at the ECB on quantitative easing. Its leaders fear that the whole austerity strategy for Europe’s crisis states will fall apart if Mr Tsipras get what he wants, and they also believe that Portugal, Italy and Spain are now strong enough to withstand contagion. There was not a flicker of tension in the debt markets of these three states today.
“Europe should clearly signal that it is not susceptible to blackmail,” said the ZEW research institute in Mannheim. It said the EU authorities should order an immediate stress test of the banks linked to Greece and drive home the message that they are willing to accept a Greek default, even if this means large losses for taxpayers.
Chancellor Merkel has so far kept a low profile, preferring to let Finland’s prime minister, Alexander Stubb, do her speaking for her. “We will not forgive any loans. We are ready to discuss extensions to programmes or extensions to loan repayment periods,” he said.
The outlines of a temporary deal are emerging. IMF chief Christine Lagarde said there is “no question of cancelling Greek debt”, deeming it unfair to other EMU states. It would entail losses for Italian and Spanish taxpayers just as much as for Germans.
Credit: Open Europe
She chose her words carefully, calling on Greece to reform the state bureaucracy, the judiciary and the tax system. “These are not austerity measures,” she told Le Monde. Syriza itself wants to reform these areas, and may in fact do better than the old Pasok-New Democracy duopoly that ran the state as patronage machine.
Mrs Lagarde seems to be searching for a face-saving formula to put off the showdown. Yet nothing on offer seems enough to meet the minimum pledge that Mr Tsipras made to his own electors.
Simon Tilford, from the Centre for European Reform, said that Greece will remain trapped in crisis even if it wins a few concessions. “Nothing likely to happen will make any material difference for the Greek economy,” he said.
“This is the first of a wave of political reactions against the failed handling of the eurozone debt crisis, and we are likely to see the same in Spain and Italy. The establishment parties have been hugely discredited,” he said.
The moral case for Greek debt relief is compelling. Leaked minutes from the IMF board in 2010 confirm that the Troika bail-outs were chiefly intended to buy time for the rest eurozone to build defences against contagion, not to help Greece.
The country should have been given debt relief at the time under normal rules. This was not done for fear of igniting an EMU conflagration. Yanis Varofakis, a newly elected MP and tipped by some to be the next finance minister, said Greece was subjected to “fiscal water-boarding” without any offsetting cure. “We have Ponzi austerity, based on unsustainable and ever increasing debts,” he said.
It set off a self-feeding spiral into seven years of depression, with GDP shrinking 26pc and the youth jobless rate peaking at 62pc. The economic crash itself is the biggest reason why public debt has ballooned to 177pc of GDP.
Pent-up demand created an illusion of recovery last year but the collapse of investment will hold back growth for years to come, and Greece is still not competitive enough within the euro to export its way back to viability. “Don’t congratulate us. We face the task from Hell,” said Mr