The Greek trap

Every day we see the same images. Men and women in suits and with serious expressions step briskly up to a revolving door, wind their way into an unfamiliar building and disappear into the darkness. The scenes are playing out in Athens, and they show the negotiators from the Institute of International Finance and the Greek government, who are meeting every day to play poker over the terms of the haircut for Greece. As agreed at the EU summit in October 2011, and under pressure from European governments, private banks and hedge funds are voluntarily to waive €100 billion.

That agreement sounded convincing, but the deal is far from being a sure thing. That’s why the bearers of aid are themselves sitting in a trap: the Europeans and the International Monetary Fund have made the write-off a condition for putting together a second rescue package for Greece of €130 billion, which should help the country get back on its feet by 2020. If no agreement is reached, however, there will be no bailout. Just bankruptcy.

To push private financial institutions into sharing the costs of the crisis has proven a huge mistake. This has since dawned on the helpers, particularly the federal government of Germany, which has been so deeply committed to the debt haircut. What is certainly true is that things have been tackled so amateurishly that even Berlin has been forced to diagnose "substantial collateral damage".

In Brussels, a EU diplomat explains what that means: “Insisting on a debt haircut has worked against us, because investors looking ahead will refuse to buy any European government securities, especially long-term securities, other than German ones." The man knows his way around in Greece. He now sees, he says, "for the first time, a real danger that we will unknowingly lose control over what is happening in Greece".

Highly explosive

The disaster with the private creditors is not the only trap Greece’s helpers are falling into. They calculated all the help from the beginning in too compartmentalised a fashion; they had to constantly adjust their programmes, which then upset or angered everyone. They angered Greek citizens, who have to pay higher taxes on less income. They angered the investors, who are sitting tight in the face of the dismal consumer climate, and furthermore will not invest one cent in the former holiday paradise, which is why no one wants to buy the state-owned enterprises that are up for sale. And finally they have angered and upset the citizens of Europe, who are getting the impression that they are handing out billions of euros to Greece, and yet everything is getting worse.

The high-ranking EU diplomat calls the mixture of all these moods "highly explosive". Stories making the rounds tell of Greek Ministry of Finance employees whose 2011 salaries were cut by 40 percent, with retroactive effect. The employees went home in the fourth quarter of 2011 not only with forty percent less salary, but, on top of that, the corresponding reductions from the first three quarters of the year taken off. The employees put their payslips on the table and ask, almost desperately, what they are to live on.

And then there's the matter of taxes. The French have now begun, with their Greek colleagues, to set up a nationally networked system for collecting taxes. If they are fast, they will have it up and running in two years. First, everything has to be advertised throughout Europe. There are deadlines, then a selection process, a bidding process, more deadlines, the award of the contract: everything must be ordered, purchased and installed, and the employees need training.

The creditors are playing poker

Even with all the good will in the world, the Greeks will not be able to collect the taxes already agreed to. The problem, says the EU diplomat, is that the objectives in the austerity and reform programmes were unrealistic. And now everyone is wondering why the Greeks cannot pull it off.

The Greek trap is yawning open once more. If the helpers are to stick to their self-made rules, they will not allow themselves to give the Greeks any more money. But do they really want this, when for the first time in years matters are actually moving forward slightly?

After all, the biggest mistake has now been fixed: high interest rates. In May 2010, the German federal government still wanted to earn money off the emergency aid for Greece. The Greeks had to pay the going market rate for the loans, and then a little something more. It sounded as if the Chancellor wanted at the same time to dole out a little punishment to the Greeks for all the trouble and for their mountain of debt, and to reassure the people at home. A year later, Berlin was forced to accept that the interest rates, which were bringing in money for the federal government, were contributing to driving Athens further down the road to ruin.

Because of the interest rates, negotiations with the private creditors are also faltering. The creditors are playing poker over tenths of percentage points, which add up to billions of euros. Last Friday, bankers and politicians said a deal was just “millimetres" away. But then the chief negotiator for the banks, Charles Dallara, left Athens, without having walked that last millimetre. He still wants something else: a political commitment that the Greek haircut will be the last haircut for private creditors. The earliest any decision on that is likely to come is after the EU summit next Monday.

Negotiations

Eurogroup increases pressure

“Eurozone finance ministers on Monday night rebuffed a deal presented by private owners of Greek debt as a “maximum” offer for the losses they are willing to sustain, opening a fresh round of brinkmanship in tortuous negotiations to ease the country’s debt load,” writes the Financial Times. European aid to Greece is conditioned on finding an agreement with the banks.

The ministers are asking that the interest rate on 30 year bonds that the banks would obtain in exchange for forgiving part of the Greek debt, be set by the banks at below 3.5% on average. The banks are asking for 4%. The higher rate would allow the banks to lose no more than 65-70% of their claims but would be too great a burden on the Greek debt in the long term.