We said that the ECB held the trump cards in dealing with Greece, via being able to impose conditions on its access to the Emergency Liquidity Authority. We thought the ECB would send an initial signal as to how opposed it was to Finance Minister Yanis Varoufakis’ bold proposals in whether it imposed conditions and how severe those were on the Greek Central bank’s request to access ELA funds, which it is sure to approve to tomorrow.
It turns out the ECB isn’t waiting that long to let its views be known. One important, but not widely recognized bone of contention is how quickly both sides need to reach a deal. Varoufakis was trying to push the timetable out until June, when Greece has to have a deal in order to avoid defaulting on maturing loans. Greece also had an earlier deadline it thought it could circumvent, that of an end of February deadline to access additional bailout funds. Varoufakis said it would not take that money (needed to pay off some maturing IMF loans) because Greece could work carefully within its existing sources of funds to meet the IMF payment and squeak by until June.
The extra time was critical to Varoufakis and Greece, both to try to win over doubts and opposition, as well as to get more support on the street and in polls in periphery countries. The longer the negotiations stay in play, the more it looks like Greece is acting like an equal, which would embolden other periphery countries.
The ECB moved today to force Greece to negotiate a deal by the end of the month. That timetable virtually assures that none of the creative measures that Varoufakis has proposed are up for discussion, that the talks will stay within the existing bailout framework. That means all the Troika is prepared to discuss on Greek debt is extensions of maturity and perhaps an interest rate reduction. While that will provide some relief in real economic terms, it is likely to fall well short of what Varoufakis and Greek voters had wanted to achieve.
The European Central Bank is resisting a key element of the Greek government’s new rescue plan, potentially leaving Athens with no source of outside funding when its international bailout expires at the end of the month.
Yanis Varoufakis, Greek finance minister, had proposed to European officials that Athens raise €10bn by issuing short-term Treasury bills as “bridge financing” to tide the country over for the next three months while a new bailout is agreed with its eurozone partners.
But the ECB is unwilling to approve the debt sale. It will not raise a €15bn ceiling on t-bill issuance to $25bn as requested by Athens, according two officials involved in the deliberations. “The Greek plan relies fully on the ECB,” said another eurozone official briefed on the talks. “The ECB will play hardball.”…
Another potential source of short-term cash being sought by Mr Varoufakis is €1.9bn in profits the ECB and eurozone central banks earned by holding Greek bonds to maturity. Under a deal agreed in 2012, that cash was to be returned to Athens, but has not been.
But officials said eurozone ministers are unlikely to allow those funds to be released without a broader agreement, complete with tough conditions.
“That will be a no go — one of many — for the member states; not without conditions,” said one official involved in the talks.
With a bank run underway and funds unlikely to return any time soon, Greece is utterly dependent on ECB support unless it is willing to have its banking system collapse. And that blow in an already prostrated economy is something that Syriza cannot responsibly inflict on voters, particularly when it shifted its campaign in the weeks before election to a moderate, pro-Eurozone posture. The ECB has issued its diktat and Greece has no choice but to fold. Varoufakis may still win some concessions around the margin, but the message is clear: he will get no big breaks on any of his major issues. The most he can hope to get is whatever the Troika is willing to trade for the Syriza’s commitment to taking on the oligarchs and reforming its tax system.