Monday, July 06, 2015

6 July 2015 Recap: The Day After the Referendum

The day after the July 5th referendum was super eventful. The bottom line: the Greek government has a much more solid foundation for reaching a compromise but the overtures from abroad are mixed.

On the domestic scene, the departure of New Democracy (ND) leader Antonis Samaras paved the way for Prime Minister Alexis Tsipras to call  a meeting of the parliamentary leaders (Golden Dawn excluded). The joint statement of the political leaders, except the Communist Party, captures the consensus: more financing, new (equitable) reforms, a pro-growth program and some commitment towards debt relief (see a translation from Greek Analyst here). Broadly speaking, this gives more space to the prime minster to negotiate a deal.

On the negotiating front, the departure of Finance Minister Yanis Varoufakis is a godsend. It has been clear from day one that his tone torpedoed all efforts to achieve some compromise. By itself, his departure will be taken as a serious sign in Europe that Tsipras is committed to cutting a deal.

On the European front, the messages have been mixed; there have been some mentions of debt relief, but the overall tone is one of anticipation of what the Greek side will bring to the July 7 Eurogroup and Euro Summit. Then, the Europeans will assess whether the Greek side has made any progress in closing the gaps that prevented a deal from taking place previously. Meanwhile, the European Central Bank (ECB) decided to “adjust the haircuts on collateral accepted by the Bank of Greece for ELA” (whatever that means).

At this stage, there are four main questions as I see them going into the next day.

First, what deal will the Greek side propose? At this stage, it seems that Greece will put on the table the last deal on offer (see here). This deal accepts the majority of the Jean-Claude Juncker proposal with some reservations. Will this deal be enough to entice the Europeans that something genuinely new is at hand? Or will this be merely seen as trying to resurrect a negotiation that for many Europeans just ended? And how will the most recent deterioration in economic conditions change the calculus on both sides (a likely recession)?

Second, how will the Greek people interpret the “No” vote. Tsipras interpreted it as “I have a stronger mandate to get a better deal.” If so, it is possible for him to come back and say, “this is the best that I can get,” and that could be the end of it, at least at the popular level. Politically he could still suffer losses within his party (including defections) but could rely on broader parliamentary backing from ND, Potami (River) and PASOK. There is, however, another scenario: what if a large chuck of the electorate really did vote no towards austerity? How will they react to a deal that includes, most likely, a lot more austerity? This brings us to question number three.

Third, how much debt relief is enough to satisfy the Greek side? Substantively, the only major contention is debt relief. The Greek side wants a deal now, whereas most Europeans would like to offer debt relief as a reward for Greece making progress towards reforms and fiscal sustainability. On the European side, it is unlikely to see major concessions, although who knows. On the Greek side, what kind of concessions would suffice? Is it enough to extend the tenor and grace period for some loans? Or will the Greek side demand a drop in the nominal amount of debt? If not, can the Greek side make the case at home that Greek debt, despite remaining at over 175% of GDP, is now sustainable?

Fourth, what is the non-fiscal package involved? So far, this has been an accounting exercise with an eye to balancing the budget and producing a surplus. But soon enough the country will need growth generated from meaningful structural reforms. What kind of reforms will the European side demand and what kind of reforms is SYRIZA, in particular, able to credibly commit to? The inability to agree on this package is probably one of the biggest obstacles in the way of a broader deal that both sides can live with.

That’s all from me on July 6.

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