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Thursday, June 11, 2015 12:38 PM

IMF Walks Out of Greece Talks; "No More Space for Gambling"; Can Greece Default and Stay in Eurozone? Russia is the Key!

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In what appears to be a "take it or leave it message to Greece", IMF says Time for Compromise is Over, and walks out of talks.

Greece’s creditors on Thursday issued their starkest warnings to Athens since the start of a five-month stand-off over the country’s soon-to-expire €172bn bailout, with the International Monetary Fund withdrawing its negotiating team and European leaders saying the time for compromise had ended.

The pointed language in public reflected growing private fears that Alexis Tsipras, Greek prime minister, had overestimated the amount of time he has left to cut a deal to release the bailout’s final €7.2bn aid tranche.

“We need decisions not negotiations now. It’s my opinion that the Greek government has to be, I think, a little more realistic,” said Donald Tusk, the European Council president, who met Mr Tsipras privately on Wednesday.

“There’s no more space for gambling, there’s no more time for gambling. The day is coming, I’m afraid, where someone says the game is over.”

The IMF was equally direct, announcing its lead negotiators had returned to Washington, citing a lack of progress in negotiations. “There are major differences between us in most key areas,” said Gerry Rice, IMF spokesman. “There has been no progress in narrowing these differences recently.”

Jean-Claude Juncker, European Commission chief, met Mr Tsipras on Thursday in what one EU official characterised as a last-ditch effort to get the Greek leader to accept a deal. “If the process was working properly, the president would not have had to have a meeting with Tsipras today,” the official said.

Signs suggest Athens has begun to shift strategy in response to the stark warnings. Nikos Voutsis, the interior minister and veteran ally of Mr Tsipras, ordered all mayors and regional governors to transfer their cash reserves immediately to the central bank — a sign the government is now bracing itself for the prospect of not winning any rescue cash before its bailout expires at the end of the month.

The German government has privately been sending signals in recent days intimating that it was time to cut off talks and adopt a more hard-line, “take it or leave it” approach to the talks.
Can Greece Default and Stay in Eurozone? 

In April, The Telegraph commented on April 25, that "Greece's Grand Plan" was to Default and Stay in the Euro. The article failed to explain how that would happen.

The Financial Times article How Greece Can Default and Stay in the Euro involves the use of scrip as the mechanism. I don't buy that story either, at least as the primary solution, but at least the FT presented a means.

Open Europe discusses the question Could Greece default and stay inside the Eurozone? but never answers it.

On January 27 the Irish Times reported Greece’s Finance Minister Wants to Default and Stay in Euro. The article never discussed how that would happen.

On April 19, Wolfgang Münchau wrote Greek Default Necessary but Grexit is Not.
Default is not synonymous with exit. There is no EU ruling that says you have to leave the eurozone when you default on your debt. The link between default and exit is indirect; if a country defaults, its defaulting securities are no longer eligible as IOUs for the country’s banks to tender at ECB money auctions. The same applies to any other debt guaranteed by Athens. The Greek banks hold quite a bit of the latter category, and might find it hard to obtain liquidity if their government falters.

So to default “inside the eurozone” one only needs to devise another way to keep the banking system afloat. If someone could concoct a brilliant answer, there would be no need for Grexit.

The economic case for a debt default is overwhelming. It is hard to see how Greece can ever service its debts as agreed. Even in the creditor countries few people are under illusions about Athens’ long-term debt-servicing capacity. Full servicing would require huge primary surpluses — that is, surpluses before payment of interest on debt. It would leave Greece trapped in a debt depression for a long time. The scheduled primary surplus for 2016 is 4.5 per cent, which is bordering on the insane. Athens absolutely needs to default.
Possible, but Unlikely, Without Russia

Of the articles, the only one that comes close is the "brilliant answer" dilemma by Münchau.

I believe the correct answer is "Possible, but Unlikely, Without Russia".

Not one of the above articles discussed Greece's primary account surplus. Simply put, Greece needs a positive current balance, ignoring debt repayments and interest on debt. Greece had a primary account surplus in 2014, but not now.

If Greece can manage to quickly regain a primary account surplus, no one can force them out of the eurozone. Is a primary account surplus "possible"?

Sure, why not? All Greece needs to do is cut pensions and step up tax collections. Of course, that is precisely what the Troika demands.

However, the Troika wanted Greece to take on all that misery just to pay back creditors. Greece would get nothing in return. This is why default is absolutely necessary.

If Greece defaults, then quickly establishes a primary account surplus, the euro it is. Technically, it's possible.

Greece may attempt a game with scrip for a while, but if it needs external funding (and it will by definition unless it runs a primary account surplus), then

1. It will have to get that funding from somewhere (and it will not be the Troika) ... OR
2. Return to the drachma (or go to some new named currency) and let the currency float.

The currency would of course sink like a rock.

There is one other possibility: Greece gets the external funding it needs from Russia for an interim period long enough for Greece to build a primary account surplus. Wouldn't that be a hoot?


If there is a default coupled with an initial attempt to stay on the euro, a combination of solutions would be likely:

  • Selective use of scrip
  • Limited external funding from Russia for a specified short period
  • Open trade with Russia killing EU sanctions
  • Russian pipeline through Greece perhaps paid in rubles

EU rules are such that every country has to agree. One key card in this mess that is not often discussed is Greece can by itself kill sanctions on Russia. EU rules require unanimous consent on treaty changes, rules, and sanctions.

Killing the sanctions would be a great thing for all involved. I encourage Greece to default.

Mike "Mish" Shedlock

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