The Greek delegation arrived in Brussels today for arguably a last-ditch effort in negotiations with Eurogroup lenders, the first such meeting after a surprising referendum result that solidified PM Alexis Tsipras’ support on the home front. Unfortunately, Greeks and Europeans hoping for a deal were dealt a psychological blow after Mr. Tsipras and the newly appointed Greek Finance Minister, Euclid Tsakalotos arrived empty-handed.
The surprise development represents the latest setback in negotiations that were already tenuous at best between the two sides. Eurogroup leaders and their Greek counterparts had last spoken over a week ago, prior to the announcement of a snap referendum and abrupt cessation of negotiations on the eve of a default with the International Monetary Fund (IMF).
The 61% majority threshold garnered during the Greek referendum underscored strong domestic support for Mr. Tsipras and his Syriza party, who staunchly opposed additional structural reforms and austerity measures for the embattled country. Refusing to give ground in spite of the electoral result, Eurogroup leaders and many market participants were bracing for some tepid sign of agreement and proposal, the last of which was summarily shot down several days ahead of the referendum itself.
With no new proposals or framework from which to work, the situation has grown increasingly dire, namely for Greece itself, which is grappling a banking system that is relentlessly heading towards insolvency. Despite recent pledges ahead of the referendum by the Greek government, banks have remained closed with capital controls firmly in place, showing no signs of abating as a recent Emergency Liquidity Assistance (ELA) from the European Central Bank (ECB) was left unchanged. By most measures, euro notes are rapidly approaching the precipice of exhaustion, despite mitigated ATM withdrawals of just €60 per day.
Greece’s lack of new proposals brought to the negotiating table today, which many have pegged as a last-ditch effort to avert the country’s path out of the Eurozone, has reportedly drawn feelings of anger and shock from some EU officials. Mr. Tsakalotos was specifically tapped by Tsipras to help bridge a wide impasse with the EU lenders, following a fractured relationship with outgoing Finance Minister, Yanis Varoufakis.
It is unclear whether the move is another gambit by Mr. Tsipras, who has been invigorated by a surge of recent anti-austerity support in Greece. According to a recent report from the Financial Times, Greece is instead opting to present a new plan tomorrow, rather than at the scheduled talks later tonight.
However, in a sign of frustration, Eurogroup finance ministers indicated they would not remain in Brussels past the scheduled talks today to consider a new Greek proposal. Rather, in this scenario, a freshly forged Greek proposal would be submitted directly to the Troika for evaluation, prior to the calling of further negotiations.
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Despite the waning optimism, there are a number of EU leaders that remain hopeful of an 11th hour agreement with Greece that would prevent any schism with Europe. In light of the steadfast opposition to additional austerity measures in Greece, roughly 80% of the population has shown a strong commitment to staying in the Eurozone. Additionally, the Greek government has deflected any likelihood of adopting a parallel currency.
According to Jean-Claude Juncker, Commission President, in a recent statement to the European parliament, “Throwing Greece out of the monetary union – or indeed the EU –is not something that we want, or should want. We have to put our little egos, and in my case very large ego, away and we have to deal with the situation we face.”
This mood was further corroborated despite, “some technical solutions” that existed between Greece and Eurogroup lenders, according to Pierre Moscovici, EU Economy Commissioner.
IMF to the Rescue?
With the clock winding down for Greece, the debt-ridden country could find support from an unlikely ally, the IMF itself. Despite being chastised as a ‘criminal organization’ as recently as one week ago by Mr. Tsipras, as well as currently being in arrears following the missed bundled payment on June 30, a possible reorganization of Greek debt could provide some slight glimmer of hope.
A recently released Debt Sustainability Analysis from the IMF warned of the need for Greek debt restructuring, long viewed as a sticking point for Greek negotiations. While the Eurogroup has been bitterly opposed to such an idea, it will be interesting, notwithstanding unlikely, to see if the international lender has a card to play in the final phase of negotiations with Greece.
The IMF does have the capacity to make allowances for countries in extreme cases of ‘exceptional hardship’, which is known in more bureaucratic terms as Article 5, Section 7G – however, this rule has never been implemented in the IMF’s lengthy history.
Regardless of any IMF-induced convalescence, the ball remains firmly in the Eurogroup’s court, with eternal EU advocate, German Chancellor Angela Merkel poised to weigh in after recently held emergency talks with fellow EU leaders. Facing ramped up pressure back home, Ms. Merkel’s perspective will lend a substantial amount of clarity on an otherwise mired outlook.
At the time of writing, the EUR/USD is firmly entrenched in negative territory, trading at 1.0957, while Greek two-year bonds have crept higher to 49.62%.