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Saturday, February 28, 2015 5:00 PM

Greece Negotiations Resume Again; "Constructive Ambiguity"; Schäuble Outmaneuvered!

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On Friday, the German Bundestag Backed the Greek Bailout Extension. Ahead of the vote, many commented that Greece collapsed.

It's not all that simple as I have explained.

The likely explanation for the alleged collapse of Syriza is Greece did not have a primary account surplus. Had it left now, it would have been forced off the euro, violating a campaign promise of Syriza.

Caving in required temporary caving in of other campaign promises.

Both Sides Got Something

The four-month extension gave Greece a better chance to prepare for default while allowing Greece to stay on the euro. The extension also gave the ECB four more months to prepare for Grexit or default.

Properly analyzed, both sides got something. Isn't that what usually happens in complex negotiations?

Third Bailout Needed

Meanwhile, it's pretty clear that Greece needs yet another bailout.

I wrote about the bailout issues and the primary surplus issues on February 11 in Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited.

"Real" Negotiations Begin

Given that Greece does indeed need a third bailout, today's headline story should not be at all surprising: Greece Seeks Negotiations on ECB Bond Repayment.

Greece called into question on Saturday a major debt repayment it must make to the European Central Bank this summer, after acknowledging it faces problems in meeting its obligations to international creditors.

Finance Minister Yanis Varoufakis said Athens should negotiate with the ECB on 6.7 billion euros ($7.5 billion) in Greek government bonds held by the Frankfurt-based bank that mature in July and August.

Varoufakis did not say what he hoped to achieve in any talks, but he accused the ECB of making a mistake in buying the bonds around the time Greece had to take an EU/IMF bailout in 2010.

"Shouldn't we negotiate this? We will fight it," he said in an interview with Skai television. "If we had the money we would pay ... They know we don't have it."

With tax revenue falling far short of target last month and an economic recovery faltering, the state must repay an IMF loan of around 1.6 billion euros in March and find 800 million in interest payments in April. It then needs about 7.5 billion in July and August to repay the bonds held by the ECB and make other interest payments.

Varoufakis, who has staged a media blitz in recent days to sell the euro zone deal to the Greek people, singled out former ECB President Jean-Claude Trichet for criticism.

"One part of the negotiations will be on what will happen to these bonds which unfortunately and wrongly Mr Trichet bought," he said. "I see it as a mistake - but the ECB did this with the aim of keeping us in the markets in 2010. They failed."

Varoufakis argued that if the bonds had remained in investors' hands, their value would have been cut by 90 percent under a restructuring of Greece's privately held debt in 2012, reducing the burden on the state.

The ECB bought the bonds at a deep discount and made large profits because their value rose as the euro zone debt crisis eased. Under Greece's second bailout deal, these profits were due to be returned to Athens to help it repay debt.

Athens received a partial payment in 2013 but euro zone countries are withholding a further 1.9 billion euros pending the review of Greece's economic plans. Varoufakis wants this money sent directly to the IMF to meet the March payment.
Curious Timing

Although the above headline and details are not surprising, the timing may appear somewhat curious. Even though the Bundestag signed off, the eurogroup as a whole has not ratified the extension.

Today's call for further negotiations ahead of that vote are sure to raise more than a few eyebrows.

Why now?

I have two possible game theory explanations

  1. Varoufakis wants to quell Greek parliament sentiment that Syriza collapsed, and he feels the need to do that right away
  2. Syriza really does not care if it is forced out of the eurozone as long as Greece can 100% without a doubt place the blame elsewhere

Advocates of position number two may argue that by caving into the demands and getting Germany to go along, it will not appear to anyone as if Syriza was responsible for Grexit, should the eurogroup parliament reject the extension.

Which is more reasonable?

As a fan of Occam's Razor (the rationale that requires the fewest assumptions is most often the correct explanation), I vote for number one.

Option 1 is self-explanatory. Option 2 requires a lie by Syriza (that it does not really want to stay on the euro), and a complex way to make that happen, absolving themselves of blame because the Greek population as a whole does want to keep the euro.

Constructive Ambiguity

As a result of the timing, I expect still more bickering accompanied by still more warnings. Nonetheless, the extension will be approved.

Also in support of theory number one is Intentional Vagueness.

Greece's finance minister says the country's agreement with its European creditors to extend its international loan agreement by four months was intentionally vague to ensure the European countries that need to have it ratified by their parliaments would be able to do so.

Greece was granted the extension by its European creditors last week in exchange for a commitment to budget reforms Varoufakis laid out in a document sent to Brussels. The list is a policy plan but does not contain specific measures or figures.

Varoufakis said that "we are very proud of the degree of ambiguity. And I use a term, constructive ambiguity."
Using Time Wisely

In the next four months, the real negotiations begin. Expect Syriza to announce it really did not cave in at all, because the document is purposely vague.

Let's revisit a couple of statements from my February 22 article Tspiras Claims to have "Won a Battle, Not the War"; Greece to Combat Tax Evasion; Illusion Shattered; Another Bailout?

  1. "Once you get them into the safe space for the next four months, there'll be another set of discussions which will effectively involve the negotiation of a third program for Greece," said Irish Finance Minister Michael Noonan.
  3. German finance minister Wolfgang Schäuble rubbed Greek capitulation in Tsipras' face with his comment "The Greeks certainly will have a difficult time to explain the deal to their voters. As long as the programme isn’t successfully completed, there will be no payout."

Schäuble Outmaneuvered 

In retrospect, number two is rather amusing. How will Syriza explain this to the Greeks?

Like this: We got a four-month extension in return for vague promises at our discretion. Essentially we got the extension for free. Now we can negotiate payments to the ECB and IMF! 

I suggest Schäuble was outmaneuvered by game theory book author Varoufakis. (See Mish's Game Theory Math)

If Syriza uses that time wisely, it can get back to a state of primary account surplus. And if it does, Greece will be in a far better position to tell the much hated Troika where to go.

I still have odds of default (with or without Grexit), well over 50% by June. Which one depends on the state of primary account surplus in June when this extension ends.

All that happened in February was approval of a four month extension giving both sides time to prepare for the inevitable.

Mike "Mish" Shedlock

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